The Monetary Problems Of India

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THE MONETARY PROBLEMS
OF INDIA

MACMILLAN AND CO., LIMITED

LONDON BOMBAY CALCUTTA MADRAS
MELBOURNE

THE MACMILLAN COMPANY

NEW YORK BOSTON CHICAGO
DALLAS ATLANTA SAN FRANCISCO

THE MACMILLAN COMPANY
OF CANADA, LIMITED

TORONTO

THE MONETARY
PROBLEMS OF INDIA

BY

L. C. JAIN

M.A., LL.B. Pii.DrWC^N. (LONDON)

READER IN ECONOMICS IN THE UNIVERSITY OK THE PUNJAB ; SHCRKTARY OF

THK UNITED PROVINCES BANKING INQUIRY COMMITTEE, 1929-30;

LECTURER IN CURRENCY AND BANKING AT THE UNIVERSITY

OF ALLAHABAD; AUTHOR OP- "INDIGENOUS

BANKING IN INDIA*'

MACMILLAN AND CO., LIMITED
ST. MARTIN'S STREET, LONDON

COPYRIGHT

PRINTED IN GREAT BRITAIN

TO

THE MEMORY OF MY MOTHER

PREFACE

THE aim of this book is to deal with the monetary problems
of India as they have arisen in recent years, particularly
during 1926-32. While literature on the subject is in
plenty, books on the recent phases of Indian currency and
credit are not many. Happily, a mass of new material has
been made available by the recent Banking Inquiry in every
province in India. The very length of the material (20,000
pages in print), however, makes the task of its analysis
rather difficult. Moreover, since the Banking Inquiry
itself new changes in fact, crises have overtaken the
money markets of the world, including India.

Thus the subject of Indian monetary problems is today
of unusual importance and difficulty. As in my work on
Indigenous Banking in India, of the imperfections of my
present venture I am fully sensible. My only justification
for its presentation is that it is the first attempt to survey
the monetary problems of the country in their recent phases
made by one who has had unusual opportunities to study
them from various angles during the last decade, and that
it may form the basis of abler and more elaborate studies.

For the opportunities to which I refer in the preceding

paragraph I feel specially indebted to Sir Basil P. Blackett,

Sir Purshotamdas Thakurdas, the Honourable Mr. E. A. H.

Blunt and Mr. Manohar Lai. To Professor T. E. Gregory,

ir Bhupendra Nath Mitra, Dr. (Mrs.) Vera Anstey, Dr.

irilbert Slater, Mr. R. A. Gray and Mrs. A. Henderson I

lust express my great obligation for reading the whole or

>art of the manuscript and for many helpful suggestions.

vii

viii PREFACE

My thanks are also due to the obliging Librarians of the
Punjab University and Public Libraries, Lahore, the London
School of Economics Library, the Library of the Office of
the High Commissioner for India and of the British Museum
Reading Room for the readiness with which they met all
my demands, and to Messrs. Sumer Chand Jain and Shadi
Lai Bhalla for their assistance in the construction of graphs.

L. C. JAIN.

UNIVERSITY OF THE PUNJAB,

LAHORE,
January, 1933.

CONTENTS

PAGE

PREFACE -~vii

CHAPTER

I. INTRODUCTORY

1. The Constituents and Nature of the Indian

Money Market ------ x

2. The Currency System before 1916 - - 2

3. The Currency System during 1916-25 - 10

4. Paper Currency, 1861-1925 16

II. THE CURRENCY COMMISSION OF 1925-26 AND AFTER

1. The Main Defects of the Currency System- - 22

2. Recommendations:

(A) A Central Bank 24

(B) The Gold Bullion Standard 25

3. Attempts at Reform:

(A) The Reserve Bank Bills, 1927 and 1928 - 30

(B) The Currency Act, 1927 - - - - 33

4. The Currency Controversy of 1926-31 36

5. The Currency Crisis of 1931 - - - 39

III. THE MONEY MARKET (A), 1926-32

1. Indigenous Bankers ----- 55

2. Loan Offices, Nidhis and Chit Funds 68

3. Co-operative Credit Societies - - - 71

4. State Loans -------85

IV. THE MONEY MARKET (B), 1926-32

1. Joint-stock Banks - - ----- 88

2. Exchange Banks -.-.-._. 104

3. The Imperial Bank of India - - - - no

V. THE MONEY MARKET (C), 1926-32

1. Post Offices 127

2. Government Loan Operations - 134

3. The Stock Exchange - 143,

x CONTENTS

CHAPTER PAGE

VI. THE BANKING INQUIRY, 1929-31

1. Origin, Constitution and Scope of the Inquiry - 155

2. Nature of the Problems 159

3. Suggested Solutions 167

VII. THE FUTURE OUTLOOK

1. Monetary Reform - 187

2. Banking Reform - 191

3. International Co-operation - 200

APPENDIX I. THE CURRENCY ACT OF 1927 - 203

APPENDIX II. THE GOLD AND STERLING SALES REGULA-
TION ORDINANCE OF 1931 - 206

BIBLIOGRAPHY --------- 209

INDEX 215

DIAGRAMS

I. WEEKLY PRICE OF 100 DOLLARS IN RUPEES, SEP-
TEMBER 1931 TO DECEMBER 1932 48

II. DEPOSITS OF THE JOINT-STOCK BANKS (1913-25) - 93
III. DEPOSITS OF THE JOINT-STOCK BANKS (1926-30) - 97

IV . JOINT-STOCK BANKING IN GREAT BRITAIN AND IRELAND

AND IN INDIA, 1929-30 125

CHAPTER I
INTRODUCTORY

i. THE CONSTITUENTS AND NATURE OF THE INDIAN
MONEY MARKET.

Meaning of 'Money Market.' A study of the monetary
problems^. oJLJfadia is, as will appear in the following
pages, a study , of ,the lack, -x>t.aJtrufemonexjmaikgtin India
^^^^^ffi^^^J^^^t^^fJLi^ ' Money Market ' in this
inquiry is not to be confined, as is sometimes the case, to
the ' organisation which provides credit of short duration,
consisting of the banks which make advances for short
periods, the discount houses which buy and sell bills of
exchange, the accepting houses or merchant bankers which,
with the banks, provide trade with first-class bills by putting
their name to them for a small commission/ The term is
used in its widest sense so as to embrace the whole financial
machinery, including the Stock Exchange and the instruments
of company promotion.

Constituents of the Indian Money Market. The con-
stituents of the Indian money market, then, if a money
market it may be called, are not only the Imperial Bank
of India, the Exchange Banks, the Indian joint-stock
banks and the indigenous bankers, including all kinds
of private moneylenders and bankers, but also the co-
operative societies, the post offices, in so far as they act
as credit receiving and remittance providing agencies, the
central and local Governments with reference to all their
currency and credit operations, and public bodies like muni-
cipalities, corporations and trusts in regard to their loaiis

2 THE MONETARY PROBLEMS OF INDIA

and investments, and the stock exchanges. Since currency
is the basis and instrument of credit, in these pages the term
' Indian money market ' covers a wide field, and a critical
survey is made of the currency as well as the complete
credit organisation of India.

Nature of the Indian Money Market. The money market
of India, even if the term is used in the more usual and re-
stricted sense of the organisation dealing in short-term credit,
is by no means so highly organised as that of England or
America. But in the wider though less common sense, the
Indian money market, in so far as it exists, is a strange
admixture of all kinds of credit institutions ancient and
modern; 1 private, public and governmental; 2 ordinary and
extraordinary, in all stages of development.

2. THE CURRENCY SYSTEM BEFORE 1916.

Having explained the term ' Money Market/ we may now
proceed to an analytical examination of its recent develop-
ment and characteristics in India. The currency, as apart
from the credit, problems of India can well be studied in
three convenient periods : (i) Before 1916, (2) 1916-25, and
(3) since 1926. An elaborate discussion of the currency
system before 1916 is not part of the purpose of this book,
which deals with the critical period 1926 to 1932, but it
will assist the process of clarification briefly to review the
first and second periods as precursors of the third.

Beginning of the Silver Standard in India in 1818. Taking
the first period, just as the Act of 1816 gave the legislative
foundation to the Gold Standard in England, 3 the Act of
1818 marked the beginning of the Silver Standard in India.

At that time India was suffering not only from a political
but also from a currency chaos; there were many coins of

1 There is no Central Bank, but the Imperial Bank of India is the nearest
approach to it.

* The Government of India plays an unusually large part in the Indian
money market. See below, pp. 134 et seq.

3 The Return to Gold, by T. E. Gregory, 1925, p. 24.

INTRODUCTORY 3

both silver and gold of different denominations in circula-
tion side by side and the money-changers carried on a
profitable trade to the loss of the general public and the
harm of trade. 1 The East India Company by the Act of
1818 made the silver rupee of 180 grains u/i2ths fine un-
limited legal tender for South India, where previously gold
coins had circulated. The reform begun in 1818 was com-
pleted in 1835, when by the Gold and Silver Coinage Act 2
the silver rupee was made unlimited legal tender and the
gold coins were deprived of their legal tender character in
the whole of British India. Bimetallism thus gave place
to monometallism and silver was preferred to gold 3 a system
which India enjoyed almost without interruption until
1893.

Framework of the Silver Standard. Like the gold standard
in England, the silver standard in India was, to begin with,
a purely metallic standard, inasmuch as the standard currency
i.e., the rupee was made of silver (165 troy grains pure).
Unlike England, Indian coins of even smaller denominations
viz., the half -rupee, quarter-rupee, and one-eighth of a
rupee were also of the same metal as the standard coin,
and they contained exactly one-half, one-fourth, and one-
eighth of the weight of pure silver in a rupee. All the coins
were legal tender the rupee and half-rupee without limit,
and others up to one rupee only.

Everyone had the right of converting silver bullion into
silver coins by taking it to the oj)en mint, and everyone
was at liberty to convert silver coins into silver bullion
by the simple process of melting them. The coinage, it
is true, was not gratuitous. Seigniorage was charged, but
the seigniorage was small (2 per cent.) and, therefore, of little
consequence. The value of the Indian rupee depended

1 My Indigenous Banking in India, 1929, pp. 11-13.

8 Act XV11. of the iyth August, 1835.

8 As early as 1806, the Court of Directors in their Despatch dated the
25th April, 1806, had declared their adherence to the principle of one metallic
standard and that silver.

4 THE MONETARY PROBLEMS OF INDIA

on the value of silver, fluctuations in one corresponding
almost exactly with those in the other.

The only coins which were ' token ' were of the lowest
denominations viz., double pice (^ rupee), pice (^ rupee)
and pie ( T -J-o rupee), whose issue was authorised by Section I.
of Act XXI. (not XVII.) of 1835, and the half-pice ( r fa rupee),
introduced by Section II. of Act XI. of 1854. But their
token character was lost sight of in their insignificant values,
and very few people realised that in the monetary system
they were rated higher than their metallic value, and that
this higher value was maintained by the fact that at that
rate there was sufficient demand for them.

In 1861, to the metallic currency was added paper currency
(see below, pp. 16 et seq.), but in the beginning (for reasons
which cannot be explained here) the latter formed but a
small proportion of Indian currency. Such notes as cir-
culated were identical in value with silver rupees, for the
former were in fact, as in law, convertible into the latter.

Gold Coins and Gresham's Law. So simple a currency
system was, however, complicated by the issue of gold
coins which, by the way, were the only coins not legal tender,
but which, like the unlimited legal tender rupees, were also
open to free coinage. It was a perfectly anomalous position.
The very Act of 1835 which put India on the silver basis
permitted by Section VII. the free coinage of a gold mohur,
or fifteen-rupee piece, 1 of the weight 180 grains n/i2ths fine
(same weight and fineness in gold as of the rupee in silver),
and of five -rupee and ten-rupee gold pieces of the same
fineness and proportionate weight as the mohur. The issue
of a thirty-rupee gold piece was authorised by the Consolidat-
ing Act (XXIII.) of 1870.

In 1837 m * nt certificates of gold were made receivable in
payment of taxes and exchangeable against silver rupees.

1 Note that the bimetallic standard of France and the Latin Union fixed
the ratio at 15 J to i. Hence gold in India was undervalued in comparison
ith gold in Europe.

INTRODUCTORY 5

After four years, by a notification in January 1841, the receipt
of gold coins mmted under the Act of 1835 was authorised
at Government treasuries at the rates indicated by the
denominations of the pieces. In issuing such notifications
the authorities evidently overlooked the simple application
of Gresham's Law, with which even a schoolboy is familiar,
for no gold could be tendered when it was undervalued
at the rate fixed, as it normally was. On the other hand,
large quantities were tendered when it was overvalued, and
this occurred after the gold discoveries in California and
Australia (1848-51) had led to a fall in the value of the yellow
metal. Then the notifications of 1837 an d 1841 were repealed
by Lord Dalhousie (ist January, 1853), and gold was de-
monetised.

Movement for Gold. Throughout the sixties and the seven-
ties of the last century there was a powerful and widespread
movement in the country for gold currency. In its issue the
bankers saw that they would profit in changing gold for silver
coins. In 1859 a representation was made by the Indian
shroffs and merchants of Calcutta, while in 1864 the com-
mercial communities of Bombay, Calcutta and Madras sent
several memorials to Government pressing on them the
desirability of issuing gold currency. 1

Closely following the gold movement, two events during
the nineteenth century deserve special mention. They are
(i) the Mansfield Commission and (2) the change in the
silver market. The first, in spite of its importance, has been
ignored by many writers on Indian currency; 2 the second
had such far-reaching consequences in India that it sounded
the death-knell of the Silver Standard.

Mansfield Commission of 1866. The Commission ap-

1 Currency and Prices in India, by C. N. Vakil and S. K. Murajan,
1927, pp. 7 and 12.

2 The notable exceptions are Dr. B. B. Das Gupta (Paper Currency in
India, 1927, p. 18, etc.). Prof. C. N. Vakil (Currency and Prices in India,
1927, pp. 25 et seq.) and Sir J. C. Coyajee (The Indian Currency System,
1835-1926, pjf.^o et seq.).

6 THE MONETARY PROBLEMS OF INDIA

pointed by the Government <3f India on the 3rd February,
1866, with Sir William Mansfield as Chairman, was the first
of its kind set up in India. The Commission distinguished
itself by making as early as 1866 two important recommend-
ations, 1 viz. : (i) the introduction of a ' universal note/ 2
and (2) the introduction of a gold currency. The first
recommendation was carried out in 1909, when for the first
time' the five-rupee note was made ' universal ' for the
whole of India; 3 the second recommendation forms the
subject of acute controversy and doubt at the present
time.

Silver Slump, 1872-92. From 1872 onwards the silver
market experienced a severe slump. The value of silver in
relation to gold kept on falling or, which is the same thing,
the value of gold in terms of silver kept on rising. This
was due to an unusual combination of causes which need not
detain us. The important fact to note is that during the
two decades preceding 1872 gold was practically throughout
15^ times as valuable as silver, while in the two decades
following 1872 gold rose to be 27 times as valuable as silver.
The average price of silver in London was 6ofd. per oz. in
1872 and 3gd. in 1892, while the exchange rate of the rupee
averaged is. nd. in 1872 and is. 3d. in i892. 4 With a fall
in the value of silver a fall in the value of the silver rupee
was inevitable, because, as already pointed out, the silver
rupee was then freely minted, so that its face value approxi-
mated closely to the value of the amount of silver in it.
During this difficult period of over two decades the Govern-
ment of India was faced with a two-fold problem. There
was first the financial problem, for with every fall in the
sterling value of the rupee the burden of the Home Charges

1 Parliamentary Papers 148 of 1868.

2 A term which seems to have been coined by the Commission. At that
time India did not possess a single ' universal ' or all-India note i.e. t a
note which was legal tender and encashable throughout India.

3 See below, p. 17.

* The rate was still falling, being is. id. in 1894. (Vakil, op. cit., p. 38.)

INTRODUCTORY 7

increased and the certainty of the Government finances
diminished. There was, secondly, the economic problem,
since instability in the value of the rupee caused great
anxiety to the merchants and great injury to India's foreign
trade.

Departure from Silver, 1893. After prolonged discussion
of the problem, in 1893 India decided to maintain the value
of the rupee by deliberately abandoning the silver standard. 1
To put the matter differently, the rupee departed from silver
with the avowed object of maintaining its parity with gold
without interference from fluctuations in the value of silver
bullion. This did not mean that the rupee gave up or even
altered its silver body, for in fact it embodied, as before,
180 grains of standard (n/i2ths fine) silver. The departure
from silver meant that the rupee in its value was no longer
identified with a weight of silver, it was given a lower value
as bullion than as coin. The former value depended, of
course, on the particular market price of silver e.g., it
was is. 3d. in 1893 with silver at 3gd. per standard ounce,
lod. in 1915 with silver at 27d. ; the latter value recommended
by the Herschell Commission in 1892 was is. 4d. per rupee.

This rating of the rupee higher than its bullion value had
two obvious merits to recommend it. In the first place,
a fall in the gold value of silver bullion need not have caused
a fall in the gold value of silver coin (the rupee), so long as
the principle of ' token ' currency was kept in action. In
the second place, a rise in the gold value of silver bullion
need not have caused a rise in the gold value of silver coin
(rupee), so long as the margin between its face and bullion
values did not entirely disappear. Of this more presently.

Recognition of an Important Monetary Principle, 1893-98.
The principle of ' token ' currency is one which now looks
quite simple. In those days, however, it was but imperfectly

1 By Act VIII. of the 26th June, 1893. Unrestricted coinage of silver
was abolished in England in 1867.

8 THE MONETARY PROBLEMS OF INDIA

understood, although it had been stressed by Professor Cannan
in his earliest writings. In Cannan 's own wards the principle
is that, 'given demand for a coin, adequate restriction of
supply will keep its value up to any required level above
that of its metallic contents/ 1 It found complete illustration
in India, when the restriction in the supply of the silver
rupee gradually led to a rise in its value from is. 2|d. in
1893 to very nearly is. 4d. (i5'978d.), the rate aimed at
in 1898.

Silver as Token Currency. It may be of interest to note
here that the Indian rupee became token as part of a planned
system, as contrasted with the English silver coins which
became token ' more by accident than by design of the State
or of monetary theorists/ 2 Further, since the silver rupee
and other silver coins in India were all of the same fineness
and proportionate weight, the moment the rupee became
a token coin, other coins automatically fell in the same
category, for no change was made in their composition. 3

Evolution of the Exchange Standard, 1898-1916. The posi-
tion was again reviewed in the first half of 1898 by the
Fowler Committee, which recommended a Gold Standard
with gold currency, but circumstances into which we need
not go did not permit India to adopt the recommendation. ,
Instead India evolved a monetary system of her own which
neither the Fowler nor the Herschell nor even the Mansfield
Commission had ever contemplated. The basis of the new

1 Money, by E. Cannan, 1929, p. 38 , see also pp. 36-39.

2 Modern Currency and the Regulation of its Value, by E. Cannan, 1931,
p. 21.

3 Some change might, however, have been welcomed while fully com-
patible with the token character of the coins. For instance, the two-anna
silver pieces which were and still are inconveniently small might well
have been accorded a better size by alteration in weight and, if necessary,
fineness or by patronising a baser metal. This, however, was not done
until the last War, when nickel two-anna pieces and even four-anna and
eight-anna (half-rupee) coins were issued. The nickel half-rupee was later
withdrawn, but the four- and two-anna pieces are still issued, and the latter
is certainly more popular than its silver counterpart which also exists.
It may, however, be pointed out that the re-issue of two-anna pieces has
been stopped since 1925-26. It is time that they were definitely with-
drawn, as they only cause worry to their holders.

INTRODUCTORY 9

system is not to be found in any legislative enactment;
it grew of itself from executive practice and depended on the
executive will. It was distinguished by two special features.

In the first place, there was the use of two currencies
the silver rupee and the gold pound one for local and the
other mainly for international purposes. In the second
place, there was an interesting mechanism by which the
value of the local currency the rupee was maintained in
terms of the English currency, the pound sterling (itself
based on gold), at a certain maximum rate.

The value of the rupee having reached the level of is. 4d.
in 1898, the Government attempted to prevent any further
rise by the devices of (i) accepting sovereigns and half-
sovereigns at R. 15 to the pound sterling; 1 (2) issuing notes
and silver rupees in exchange for gold coin and bullion at
the rate of is. 4d. to the rupee; (3) offering Council Bills 2
in exchange for sovereigns in London at a rate approximating
to is. 4d. On the other hand, the value of the rupee was
prevented from falling below approximately is. 4d. by (i)
restricting or stopping the sale of Council Bills; (2) with-
drawing rupees in circulation by means of transfers to the
Paper Currency Reserve in India and the use of the equivalent
of the same amount by the Secretary of State in England;
(3) selling Reverse Councils at a rate of is. 3f f d.

Thus the currency system of India from 1898 onwards was
a system built up and managed by executive action in which
the rupee was unlimited legal tender and the right was given
by ordinance to demand rupees for gold, but not to demand
gold for rupees. All was well so long as the Government was
both willing and able to give at is 4d. parity not only rupees
in exchange for sovereigns or gold, but also sterling in ex-

1 Government undertook to accept sovereigns and half-sovereigns in
1893, and declared them, legal tender in 1899.

2 Council Bills are bills payable in rupees in Calcutta, Bombay, or Madras,
drawn by the Secretary of State for India on the Indian Government.
Reverse Councils are bills payable in gold in London, drawn by the Indian
Government on the Secretary of State at his direction. In either case it is
the Secretary of State who controls the issue.

io THE MONETARY PROBLEMS OF INDIA

change for rupees. But trouble ensued if it was either un-
willing to do so, as in 1907,* or unable, as m 1916, owing to
causes which will be explained later.

In the light of the foregoing, it would appear that the
monetary system of India from 1898 to 1916 was an exchange
standard. But it was not, strictly speaking, a gold ex-
change standard, for there was no obligation on the currency
authority during this period to give gold in exchange for
the local standard currency (the silver rupee). It was a
sterling exchange standard, which, however, practically
amounted to a gold exchange standard, so long as sterling
was not divorced from gold and so long as the Secretary
of State and the Government of India maintained the
interchangeability of rupee into sterling and sterling
into rupee.

3. THE CURRENCY SYSTEM DURING 191(5-25.

The Breakdown in 1916. The outbreak of the World War
inaugurated a revolutionary change in the monetary situation
all over the world. The immediate effects of the War were
exhibited in India in (i) a great demand for sterling re-
mittances; 2 (2) withdrawals of savings bank deposits; 3
(3) lack of confidence in the note issue, and a demand for
gold. 4 All these events were anticipated and dealt with
satisfactorily. What was not expected, however, was the
unprecedented rise in the price of silver which began in
1916. The fall in the value of silver had led to the value of
the rupee being divorced from that of its metallic contents
after 1893, but the rise in the value of silver restored the
former position.

1 Exchange was weak owing to partial failure of the summer monsoon,
and Government was reluctant to sell Reverse Councils.

2 Up to the end of January 1915 Reverse Councils to the extent of
8,707,000 were sold. (Indian Year Book, 1931, p. 861.)

3 About R. io crores were withdrawn within a few months (see below,
p. 128).

4 Notes to the extent of R. io crores were encashed ; issue of gold had to
be suspended. (Indian Year Book, 1931, p. 861.)

INTRODUCTORY n

As already explained, the working of the pre-War currency
system was based on the willingness and ability of the
Government to supply rupees in exchange for gold or sterling,
and sterling in exchange for rupees at is. 4d. per rupee. Since
the silver rupee was a token coin, the former condition de-
pended upon the price of silver being not higher than 43d.
per standard oz. (n/i2ths fine) ; for at that price the exchange
value of a rupee at is. 4d. coincided with its bullion value.
Now the price of silver in 1915 was 27 Jd., but in April 1916 it
had risen to 35 Jd., in December 1916 it was 37d., and in August
1917 it reached the level of 43d. , l at which point the face value
of the rupee and its intrinsic value were identical. But this in
itself was a source of much trouble to Government, for as the
price of silver was still rising, it was obvious that silver
rupees could not be offered in exchange for sterling at the
rate of is. 4d. except at a considerable loss to the State.

On the other hand, the demand for rupees was greatly
accentuated owing to two unexpected causes viz., (i) an
unusually large excess of Indian exports over imports, 2 and
(2) heavy expenditure in India on behalf of the British
Government. 3 Neither the import of precious metals (for
there was an embargo on their movements) nor credits in
India were possible. How was the situation to be met ?

History repeated itself, and during 1917-19 the rupee was
allowed to rise in value it was impossible to prevent it
along with the rise in the value of silver, just as during
1872-92 it had fallen in value with the fall in the value of
silver. In other words, the sterling exchange standard
which had done service for nearly twenty years broke down
in 1916, and its place was taken once more by a silver
standard. At the same time, to meet the special emergencies

1 Indian Currency and Exchange, by H. L. Chablani, 1929, p. 85.

2 Taking the years 1916-17 to 1918-19, the excess of exports over im-
ports was j6,ooo,ooo more than in the corresponding years of the previous
quinquennium. (Indian Year Book, 1931, p. 86 1.)

3 The expenditure by December 1919 aggregated 240,000,000. (Indian
Vear Book, 1931, p. 861.)

12 THE MONETARY PROBLEMS OF INDIA

of war, exchange was strictly controlled by Government, 1
and Council Bills were offered at rates which were raised
from time to time in accordance with changes in the silver
position. The price of silver rose from 43d. in August
1917 to s8d. in May 1919, and to ySd. about the middle
of December 1919. The minimum rate for immediate
telegraphic transfers was is. 4|d. on 3rd January, 1917;
is. 5d. on 28th August, 1917; is. 8d. on i3th May, 1919;
and 2s. 4d. on I2th December, igig. 2

The Blunder of 1920. At the end of the War a Committee
presided over by Mr. (afterwards Sir) T. Babington Smith
reviewed the currency and exchange position, and their
most important recommendation was to link the rupee to
gold not sterling at the rate of 2s. per rupee. In making
this recommendation it was largely influenced by two factors
viz., (i) the rise in the gold value of silver, and (2) the
decline in the gold value of sterling, which was then about
30 per' cent, below par. The members seem not to have
anticipated either a reversal in the behaviour of the silver
market or a rehabilitation of sterling. Actually the subse-
quent fall in the price of silver outstripped its preceding rise.
In February 1920 the price of silver was Sgjd. per oz. ; four
months later, in June 1920, it was less than half (i.e., 44d.).
Moreover, while the Babington Smith Committee was
drafting its report, the British Government was accepting
the principles laid down by the Cunliffe Committee, which
prescribed a policy of deflation, the effect of which was to
force up the value of sterling very rapidly. Left to itself the
silver rupee, like a standard coin, should have fallen in value
with the fall in the value of silver, and would have been in
June 1920 in the neighbourhood of is. 4d. sterling. When
the price of silver rose during 1916-19 and the silver rupee

1 Recent parallels of drastic exchange control have been afforded by
Germany, Austria, Greece, Yugoslavia and Latvia. (The Gold Standard
and its Future, by T. E. Gregory, 1932, p. 65.)

2 Indian Year Book, 1931, p. 86 1.

INTRODUCTORY 13

ceased to be a token coin in the full meaning of the term,
Government was compelled to acquiesce in raising the rate
of exchange in accordance with the rise of the value of silver.
But the authorities did not realise the necessity of reversing
the process when the value of silver fell in igzo. 1

But it might be urged that if Government could keep up
the value of the token rupee by adequate restriction of its
supply at is. 4d., it could also keep it up at a higher level,
say 2s. And was that not the recommendation of the 1909
Committee ? Undoubtedly a 2s. gold rupee could be
achieved in course of time, given a certain demand for the
rupee currency, by adequate restriction of its supply; but,
other things being equal, what would have been an adequate
restriction for is. 4d. sterling level would have been quite
inadequate for the 2s. sterling level and still less for the 2s.
gold level, since sterling in June 1920 was depreciated in
terms of gold. But were conditions the same ? The demand
for silver rupees had changed a very important factor for
the problem in question. About the beginning of 1920 the
balance of trade had turned against India; in other words,
a fall in the demand for rupees had begun, and its effect
could be seen in a fall in the rate of exchange by April
1920 to 2s. 4d. sterling (is. lojd. gold). At the same time
world prices were falling. All the circumstances, therefore,
were unfavourable for artificially raising the value of the
rupee. Indeed, to maintain the 2S. gold rupee was im-
possible except by the necessarily painful process of enormous
deflation continued over a period of several years. The
Babington Smith Committee had realised that the fall in
prices was possible, though it had not regarded it as probable,
and included in its report a recommendation that if it should
come, the policy of aiming at a 2s. rupee should be recon-

1 ' I must reiterate the belief that the real mischief was done not when
the rate of exchange was raised to meet the rise of silver, but when it was
not lowered as silver fell.' (Article on Indian Currency and Finance, by
Sir Stanley Reed, Bankers' Magazine, September 1926, p. 308.)

14 THE MONETARY PROBLEMS OF INDIA

sidered. It was the least pardonable of the errors of the
Secretary of State that he ignored this warning.

The Government announced its acceptance of the recom-
mendations of the Currency Committee of 1919 on the
2nd February, 1920, when the rupee was 2s. gd. sterling,
and declared the rupee equal to 2s. gold or 11*30016 grains
of fine gold. 1 Silver had reached its maximum price in the
previous December, and a rapid fall had begun, but the
deflation policy in relation to sterling only took effect at the
end of March ; hence for two months the sterling equivalent
of 2s. gold was increasing. In accordance with the declara-
tion of the Government, the Secretary of State started selling
Reverse Councils in limited amounts at rates varying between
2s. 3f JSd. and 2s. lo^d. sterling in accordance with the
depreciation of sterling. Financial difficulties, however,
made it impossible to withdraw the equivalent in rupees
from circulation, an operation through which alone the
sale of Reverse Councils could help the maintenance of the
value of the rupee. Owing to the course of Chinese trade
the gold value of silver, and therefore the bullion value of
the rupee, was falling very rapidly; and owing to the fact
that instead of the normal great excess of Indian exports of
merchandise over imports there was a great excess of imports
over exports, the demand for rupees for external trade pur-
poses had disappeared, and had been succeeded by a keen
demand for sterling, the offer of Reverse Councils in limited
quantities at prices which offered a great profit to the pur-
chasers, elicited tenders rising rapidly to fantastic figures,
and the failure to satisfy more than an infinitesimal portion
of this demand naturally tended to intensify still further the
depreciation of the rupee.

After a vast quantity of Indian sterling reserves had been
dissipated by selling Reverse Councils, i.e. by buying rupees,
at the 2s. gold rate, the Secretary of State reduced his price

|i Act XXXVI. of 1920.

INTRODUCTORY 15

to 2s. sterling as from 24th June, 1920, the market value
having already fallen below this rate, and continued the
process up to the 28th September, 1920, much to the indigna-
tion of all sections of Indian opinion. The sale of Reverse
Councils from the beginning of 1920 totalled 55,382,000,
and at the end of this series of transactions the sterling value
of the rupees purchased was about 25 millions. 1

September 1920 to August 1925. From October 1920
till August 1925, when the recent Royal Commission on
Indian Currency and Exchange was appointed, the exchange
was not, as is sometimes supposed, left to look after itself.
But it was managed on expedients different from those
adopted before. With the stoppage of the sale of Reverse
Councils, the exchange, weak as it was, dropped down to
as low a rate as is. 2$d. (under is. gold) in March I92I. 2

According to an official statement, currency was con-
tracted to the extent of R. 31 crores 58 lakhs in the year
1920-21 and ' the contraction of currency was continued in
1921-22 and 1922-23 by the transfer of sterling securities
held in London to the Secretary of State's cash balance and
by the discharge of Indian Treasury Bills held in the Re-
serve/ 3 This had the effect of restoring the rate to is. 4d.
sterling by January 1923. Circumstances again became
favourable in 1923 and 1924 for an improvement in the rate
of exchange, the downward movement in world prices had
been temporarily interrupted, the budgetary position was
satisfactory, the monsoons were good, and the balance of
trade was once again in favour of India. In October
1924 the rate was is. 6d. sterling (is. 4d. gold).

In 1923-24 an important change in the system of Govern-
ment remittances was introduced. In the past the Secretary

1 The note circulation between ist February and i^th September, 1920,
was reduced from R. 185 crores to R. 158 crores only. (Royal Commission
on Indian Currency and Finance, Minutes of Evidence, 1926, vol. ii., p. 15.)

2 Royal Currency Commission, Minutes of Evidence, vol. ii., p. 32.

a The net contraction affected was 1,11 lakhs and 5,69 lakhs during
1921-22 and 1922-23 respectively. (Currency Commission, Evidence,
vol. ii., p. 18 )

16 THE MONETARY PROBLEMS OF INDIA

of State for India sold in London, by tender, Council Bills
and Telegraphic Transfers once a week, and Intermediates
between weekly sales. The sales of the Intermediates was
stopped, and the Government of India started purchasing
sterling in India through the Imperial Bank from exchange
banks and recognised firms. The object of the change, in
the words of Government, was ' that the factors influencing
the immediate course of exchange could be gauged more
accurately and more promptly in India by regulating the
purchases with reference to the varying conditions of the
market, the operations of Government could be conducted
so as to avoid fluctuations in rates with benefit both to trade
and to the country generally/ 1 This had the effect of
keeping exchange on the whole steady at is. 6d. sterling
from October 1924, and since sterling returned to the gold
basis in April 1925, the is. 6d. sterling coincided with is. 6d.
gold from that date.

4. PAPER CURRENCY, 1861-1925.

The Paper Currency Ad of 1861. To complete the picture
of the Indian currency system up to 1925, a brief analysis
of the origin and development of paper currency may also
be given. ^The year 1861 stands out as an important land-
mark in the history of Indian paper currency, for it was by
Act XIX. of that year 2 that the Government of India, for
the first time, assumed the sole right of issuing paper currency
in India. Following the English model, the system was
based on what is called the currency principle of note issue.
There was a fiduciary note issue limited to R. 4 crores, and
all notes issued in excess of that limit had to be covered by
an equivalent in silver coin or bullion. The fiduciary limit
was gradually raised to 14 crores in 1911.

1 Royal Currency Commission, 1926, Minutes of Evidence, vol. ii., p. 22.

2 Prior to 1861, under the Acts of 1839, 1840 and 1843 the Presidency
Banks of Bengal, Bombay and Madras were authorised to issue notes pay-
able on demand, but the circulation of these notes was limited practically
to the Presidency towns.

INTRODUCTORY 17

Circles of Issue. But, unlike England, India was at first
divided, for the purpose of paper currency, into three
distinct circles of issue with headquarters at Calcutta,
Bombay and Madras. Later the number of circles grew
and varied, 1 but it finally settled down to seven in igio. 2
The present circles of issue are the three original ones i.e.,
Calcutta, Bombay and Madras and four others, viz. Cawn-
pore, Karachi, Lahore and Rangoon. As a consequence of
the institution of circles of issue, notes of one circle con-
tinued for a long time to be legal tender and encashable only
within that circle.

Introduction of ' Universal Notes/ The restriction of the
legal tender character and encashability of currency notes
to their respective circles of issue was an obvious disadvant-
age. The first step to remove the restrictions was taken in
1903 when by Act VI. five rupee notes were made ' universal ' 3
throughout India except Burma. The exception in regard
to Burma was removed by Act II. of 1909. The privilege
of an all-India note was extended to ten and fifty rupee notes
in 1910 and to one hundred rupee notes in ign. 4 The five
hundred and one thousand rupee notes have also become
' universal ' with effect from the I3th June, 1931. 5 The
only note still suffering from disability in circles outside
that of its issue is of the highest denomination, viz. ten
thousand rupees.

Lack of Elasticity. Another feature which has character-
ised the Indian paper currency from the very beginning is
the lack of elasticity. No effort appears to have been made
to improve matters until the War of 1914-19. It is interest-
ing to note, however, that the closing of the Indian mints to
the free coinage of silver in 1893 had the unconscious effect
of indirectly imparting some elasticity to the paper currency.

1 Paper Currency in India, by B. B. Das Gupta, 1927, pp. 90-92, etc.

2 By the Currency Act of 1910 the sub-circles opened in 1864 were
abolished and replaced by circles. 3 See above, p. 6.

1 Moral and Material Progress of India, 1911-12, p. 168.
& Capital, nth June, 1931, p. 1086.

i8 THE MONETARY PROBLEMS OF INDIA

By 1898 the rupee had definitely become a token coin, and
'a ten rupee note could be issued by buying silver worth
even less than six rupees, coining it into ten rupees, and
keeping the latter in the Paper Currency Reserve as the
necessary metallic basis under the law/ 1 To put the matter
succinctly, the token character of the rupee as the backing
of Indian paper currency gave it a certain measure of elas-
ticity at times.

Paper Currency during the War, 1914-19. The inelasticity
of the paper currency in India was brought out, as never
before, during the War. Prior to the War, the fiduciary
note issue was limited to R. 14 crores. Between November
1915 and December 1919 the limit had to be raised a
number of times until it was 120 crores. With a view to
economising silver, whose rising value made it increasingly
difficult for Government to coin rupees, small currency notes
of the denominations of two and a half rupees and one rupee
were issued in I9I7- 2 There was thus an increase of paper
currency in the country throughout the War as will be seen
from the following table : 3

(In Lakhs of Rupees.)

Circulation on

Average

3ist March.

Circulation.

Year.

Gross. Active.

Gross.

Active.

1913-14 -

66,12

49,97

65,55

46,63

1914-15 -

61,63

43,96

64,04

45,43

1915-16 -

67>73

53,19

64,10

48,08

1916-17 -

86,37

67,08

76,14

59-36

1917-18 -

99.79

84,30

1,01,77

71,87

1918-19 -

i,5346

1,33,58

i,33,2o

1,13,84

1919-20 -

1,74,52

i,53,78

1,71,68

i

1,51,10

1 Chablani, op. cit., p. 22.

2 These notes were later withdrawn, and finally ceased to circulate from
the 1st January, 1926.

3 Report of the Controller of the Currency for 1926-27, p. 31.

INTRODUCTORY 19

Reforms of 1919. With a view to reforming the paper
currency and giving it greater elasticity the Indian Currency
Committee of 1919 made two important recommendations.
These were that the metallic portion of the Reserve should
be 40 per cent, of the gross circulation, and as an experi-
mental measure notes might be issued against the security
of bills of exchange up to a limit of 5 crores. 1

Legislation of 1920 and After. In 1920 a very important
Act (XLV.) was passed which made both temporary and
permanent provisions with regard to the Paper Currency
Reserve. The temporary provisions which came into effect
from the ist October, 1920, allowed rupee and sterling
securities to be held in any proportion up to a total limit of
only 85 crores (instead of 120) . Further, the gold and sterling
securities in the Reserve were to be revalued on the basis of
R. 10 per sovereign and the gap was to be, filled by the issue
of ad hoc securities of the Government of India.

The permanent provisions were designed to introduce
automatic elasticity in the paper currency circulation by the
following two devices: In the first place, the fiduciary
portion of the Reserve was no longer to be a fixed amount,
but was to be such as not to exceed the value of the metallic
portion. In the second place, emergency paper currency
up to a limit of 5 crores could be issued against commercial
bills of exchange of a maturity not longer than ninety
days. 2

By the Indian Paper Currency Amendment Act of 1923
the limit of emergency currency was raised from 5 to 12
crores. Of the 12 crores, the first 4 crores could be lent to
the Imperial Bank of India when the Bank rate was 6 per
cent., the next 4 crores when it was 7 per cent, and the last

1 Report of the Indian Currency Committee, 1919, para. 80.

2 Detailed regulations on the subject were issued on the i6th February,
1922, under which notes up to 5 crores were to be lent to the Imperial Bank
against internal trade bills or hundis (not export and import bills of ex-
change as recommended by the Currency Committee of 1919) at 8 per cent,
per annum.

20 THE MONETARY PROBLEMS OF INDIA

4 crores when it was 8 per cent. This scale was revised in
September 1924, so that the first four crores could be lent
at 6 per cent, and the remaining eight crores at 7 per cent. 1

In February 1925 the Indian Paper Currency (Amend-
ment) Act was passed by which the permissible limit of
the holding of securities in the Reserve was raised from 85
to 100 crores, of which not more than 50 crores were to be
ad hoc securities of the Government of India.

Progress of Note Circulation, 1920-25. The progress of
note circulation after the termination of the War was far
from rapid. The statistics 2 are given below, but the causes
of the slow progress are dealt with in the next chapter.

(In Lakhs of Rupees.)

Circulation on Average

3ist March.

Circulation.

Year

Gross.

Active.

Gross.

Active.

I92O~2I -

1,66,16

1,47,88

1,63,51

1,38,88

1921-22 -

1,74,76

1,57,23

' 1,73,80

1,52,22

1922-23 - - - ; 1,74,70

1,61,10

1,76,33

1,53,27

1923-24 -

1,85,85

1,69,06

I,79,OI

1,56,93

1924-25 -

1,84,19

1,66,55

1,79,27 1,60,91

Character of Note Circulation, 1920-25. A word may be said
in regard to the character of the note issue. During the
quinquennium 1920-25, both the ten and one hundred rupee
notes, but the former much more than the latter, gained
in popularity at the expense of notes of other denominations.
This may be seen from the table on page 2i. 3

Decline in Encashment of Foreign Circle Notes, 1920-25.
Another interesting feature of the quinquennium under

1 For further details on the subject see Royal Currency Commission, 1926,
Minutes of Evidence, vol. ii., pp. 21 et seq.

z Report of the Controller of the Currency for 1926-27, p. 31.
* ibid., p 64.

INTRODUCTORY

21

Year.

Percentage to Gross Circulation (excluding
R. 10,000 Notes) of the Circulation of Notes for

Total.

Rs.
i.

Rs.

2/8.

Rs.
5-

Rs.

10.

Rs.
50.

Rs.

IOO.

Rs.
500.

Rs.
1,000.

1920-21 -
IQ2I-22
1922-23
1923-24 -
1924-25 -

6-4

6-2

67
6-6
2-5

4

2
I

9'5

IO-O
10 -0

9'3
9'3

35-5
36-3
347
33'4
40-5

2-6

2-5
2-3

1-8

i'5

31-9

34*2
3^-4
40*5
377

17
i'3

I-O

9

-8

12 -O

9'3

8-8

7'5
77

IOO
IOO
IOO
IOO
IOO

review is the marked decline in the encashment of foreign
circle notes. The statistics 1 below are self-explanatory:

Year.

1920-21
1921-22
1922-23
1923-24
1924-25

Amount of Foreign Circle

Notes Cashed in the Various

Circles.

60,97,59,380
50,86,41,460
44,49,60,520

34,60,31,900

1 Reports of the Controller of the Currency for the years 1923-24 and 1924-25 ,
pp. 93 and 67 respectively.

CHAPTER II

THE .CURRENCY COMMISSION OF 1925-26
AND AFTER

i. THE MAIN DEFECTS OF THE CURRENCY SYSTEM.

BY 1925 currency conditions throughout the world were
becoming more stable: in April 1925 England returned to
the gold standard and was followed by the Union of South
Africa on the ist July and by Australia and New Zealand.
On the 25th August, 1925, a Royal Commission was appointed
' to examine and report on the Indian exchange and currency
system and practice, to consider whether any modifications
are desirable in the interests of India and to make recom-
mendations/ So thoroughly did the Commission go about
their task that whatever differences there may exist in
regard to their recommendations, there is no denying the
fact that their report which was signed on the ist July,
1926 is one of the most important financial documents of
recent years.

According to their findings the Indian exchange and
currency system in 1926 suffered from the following main
defects :

' (i) The system is far from simple, and the basis of the stability
of the rupee is not readily intelligible to the uninstructed public.
The currency consists of two tokens ' (silver rupees and currency
notes) ' in circulation, with the unnecessary excrescence of a
third full value coin ' (the sovereign) ' which does not circulate
at all. One form of token currency ' (silver rupees) ' (into which
there is an unlimited obligation to convert the other) is highly

22

CURRENCY COMMISSION OF 1925-26 AND AFTER 23

expensive, and is liable to vanish if the price of silver rises above
a certain level. 1

(2) There is a cumbrous duplication of reserves, with an
antiquated, and dangerous, division of responsibility for the
control of credit and currency policy.

(3) The system does not secure the automatic expansion and
contraction of currency. Such movements are too wholly
dependent on the will of the currency authority. 2

(4) The system is inelastic. The utility of the provision for
elasticity made on the recommendation of the Babington Smith
Committee is affected by the methods of financing Indian trade/ 3

The first and third defects hardly require any further
elucidation. As regards the second, Government held in
April 1926, as it does even now, two reserves the Paper
Currency Reserve and the Gold Standard Reserve. The
former consists of the proceeds of note issue and serves as
a backing against the notes in circulation; the latter has
been built up from the profits of the coinage of silver rupees
and is meant to maintain their external value. But the
distinction between the functions is not very clear and they
often overlap. If notes are to be converted into silver
rupees and the latter are to have a certain fixed value, the
convertibility of notes into rupees would also imply the
maintenance of their external value. Similarly the task of
maintaining the external value of the silver rupees, so long
as they must be given in exchange for notes, must involve
the maintenance of the external value of the notes at the
same time. These reserves two where they could well be
one were in 1926, as they still are in 1933, separated from
the banking reserves of the country. ' The Government
controls the currency. The credit situation is controlled,
as far as it is controlled at all, by the Imperial Bank. With

1 With the is. 4<i. rupee its meltiug point is reached when the price of
silver is 43d. per standard ounce; with the is. 6d. and 2s. rupee, when the
price of silver is 48d. and 63d. per standard ounce respectively. (See above,
pp. 10-11.) 2 See above, pp. 8 et seq.

3 Report of the Royal Commission on Indian Currency and Finance,
1926, p. 10.

24 THE MONETARY PROBLEMS OF INDIA

divided control, there is likelihood of divided counsels and
failure to co-ordinate/ 1

Taking the fourth defect viz., the inelastic currency it
is one of the curious features of the Indian currency situation
that, in spite of the readiness of Government to issue emer-
gency currency with a view to relieving financial stringency
in busy seasons, the financial stringency has often remained
unrelieved. As already noticed in the preceding chapter,
under Section 20 of Act X. of 1923 (amended in 1924), the
Imperial Bank of India is entitled to receive funds up to
12 crores of rupees against self-liquidating hundis or trade
bills. But it is a great defect that emergency currency
cannot be issued until interest rates are at a certain level.
Secondly, the difficulty comes in finding an adequate supply
of such bills, because they are not drawn in large numbers.
Trade in India is generally financed by means of cash credits
or promissory notes not hundis or bills. 2

2. RECOMMENDATIONS: (A) A CENTRAL BANK.

Bearing in mind the foregoing defects of the Indian
monetary system, the two outstanding recommendations
of the Commission, to which all others are ancillary, were
(i) the establishment of a Central Bank and (2) the intro-
duction of the Gold Bullion Standard.

The main object of the establishment of a Central Bank
was to provide a unity of policy in the control of credit for
the achievement of monetary stability. It was to be an
entirely new institution quite apart from the Imperial Bank
of India. 3 The new institution, to be called the ' Reserve
Bank of India/ was, like other Central Banks of the world,
to have the usual four rights: the right of note issue, the

1 Report of the Royal Currency Commission, 1926, p. 9.

2 For further details on the subject see my Indigenous Banking in India,
1929, pp. 179-81.

3 Sir Purshotarndas Thakurdas in his. Minute of Dissent to the Royal
Currency Commission Report (pp. 119-20) favoured the conversion of the
Imperial Bank into the Reserve Bank of India.

CURRENCY COMMISSION OF 1925-26 AND AFTER 25

right to hold the reserves of the commercial banks, the right
to buy and sell securities, and the right to discount bills. 1
Like the Bank of England, the Reserve Bank of India was
to be a shareholders' bank with a fully-paid-up capital of
R. 5 crores. Unlike the Bank of England, but with a view
to ensuring for it beyond any manner of doubt freedom from
political pressure and conduct of business on ' lines of
prudent finance/ a director of the Bank was not to be a
member of the provincial or central legislature or a represen-
tative of any commercial bank.

Following the practice of the Imperial Bank of India, the
Reserve Bank was to have three local boards and a central
board. The central board was to consist of 14 voting
members and I non-voting member as follows :

' (a) Presidents and Vice-Presidents of the local boards and
one other member elected by each of them.

(b) A Managing Governor and a Deputy Managing Governor
to be appointed by the Governor General in Council.

(c) Not more than three non-official members to be nominated
by the Governor General in Council.

(d) A Government official having the right to attend and
advise, but not to vote/

The Bank was to enjoy an assured life of 25 years, in the
first instance, as compared with 12 years in the case of the
Bank of England at its inception in 1694. Finally, like the
Bank of England, it was to work through two departments,
the issue department and the banking department a system
which in the opinion of the Macmillan Committee is without
much meaning. 2

2. (B) THE GOLD BULLION STANDARD.

The second important recommendation of the Royal
Commission was in regard to the particular monetary system

1 Committee on Finance and Industry, London, 1931 (Cmd. 3897), p. 16.

- Ibid., paras. 331-336. In paras. 337-340, the Committee definitely re-
commends the amalgamation of the banking department with the issue
department.

26 THE MONETARY PROBLEMS OF INDIA

which would best suit the changing conditions of India. The
Commission considered several alternative policies viz., an
improvement of the sterling exchange standard, a gold
exchange standard, and a gold standard with or without gold
currency. Every one of these standards was subjected to a
close examination with reference to India's special circum-
stances, and it was the unanimous verdict of the Commission
that no standard other than gold would either suit or satisfy
the Indian conditions. In fact no monetary standard in
the world has yet proved to be quite satisfactory, but, accord-
ing to western experience, of all monetary standards the gold
standard in 1926 seemed to be the least unsatisfactory. 1
India had long desired a gold standard, so that the important
question was not whether India should or should not have a
gold standard, but what particular form of gold standard
was most suitable. Sir Basil Blackett's scheme was to give
India a gold standard of the pre-War pattern i.e., a gold
standard with a gold currency, but this, of course, involved
the purchase of large stocks of gold. The United Kingdom
of Great Britain and the United States of America could be
invited to give up part of their gold stocks, but that would
have had the undesirable consequence of still further de-
flating the currency and of intensifying the fall of prices in
those countries. England had returned to the gold standard
only in April 1925, and neither England nor America could
view with favour such disturbance to their monetary systems
and injury to trade and commerce generally. Moreover,
all such further depression of prices would be injurious to all
debtor countries, and to India specially, as a debtor country
with heavy sterling liabilities. Thirdly, India could not
purchase gold without at the same time selling silver. Large
sales of silver were bound to upset the silver market and
prove injurious to the interests of the Indian people and
Government itself. The disturbance of the silver market

1 The Return to Gold, by T. E. Gregory, 1925, p. 60.

CURRENCY COMMISSION OF 1925-26 AND AFTER 27

might affect the Chinese trade and induce China to give up
her silver standard in favour of gold with further accentuation
of the evil. The Commission, therefore, recommended for
India the gold bullion standard on the new English model
a new type of the gold standard with no gold currency in
circulation. This standard claimed the virtue of being (i)
as effective a gold standard as any gold standard can be, and
(2) not so expensive as a gold standard in the nineteenth-
century sense must necessarily be. On the other hand, the
gold standard with gold currency in circulation had been
in use in England until the outbreak of the War and
with it India had been long familiar. The new standard
(without gold currency) was new even to England, and of
it India knew next to nothing. Indian public opinion had
thus a prejudice against it from the very beginning, and it
did not receive an impartial consideration on its merits.
Such an impartial consideration would have revealed another
defect. The policy recommended and also the policy
actually carried out involved the replacing of silver in the
reserves by gold, and therefore added to the appreciation of
gold and depreciation of silver, both of which are injurious
to India. It was therefore open to the same objection as the
policy of establishing a gold standard with a gold currency,
but not, of course, to the same degree.

Peculiarities of the Proposed Standard. It must not be
supposed, however, that the gold bullion standard proposed
for India agreed in every particular with that adopted in
England in 1925. In fact the two varied in several respects,
and they may well be compared and contrasted with a
view to clearing up the position.

In the first place, in both the systems the unit of currency
was to be equal in value to a fixed and invariable quantity
of gold bullion. But while in England the pound sterling
in the Act of 1925 retained its old gold parity of 113*0016
grains gold, the rupee in India was proposed to be linked to

28 THE MONETARY PROBLEMS OF INDIA

a new gold parity of 8-47512 grains gold, its pre-War gold
parity, if there was one, being 7*5334 grains gold. In fact
a statutory gold parity of the rupee before the War did not
exist, the parity kept up by Government was is. 4d. sterling,
although in practice it amounted to 7*5334 grains gold. 1 The
rupee did have a statutory gold parity of 11-30016 grains gold
after 1920, but that parity had been inoperative. 2 The
proposal of the new parity, although it was recommended by
all members of the Commission but one, caused the greatest
dissatisfaction in India and clouded some very important
issues. To this discussion, however, we shall return
presently. 3

Secondly, the Bank of England, according to the Act of
1925, was under a statutory obligation to buy gold in un-
limited quantities at the rate of 3. 173. gd. per standard
ounce (n/i2ths fine), and to sell gold without limit, but in
quantities of not less than 400 ounces fine at 3. 173. iod.
per standard ounce. It was proposed that the currency
authority in India (the proposed Reserve Bank of India)
should also be under a similar statutory obligation in regard
to the purchase and sale of gold with no maximum limit,
but with this difference, that the minimum limit of 400 fine
ounces was to apply to the purchase of gold as well as its
sale. Further, the Commission elaborated an original and
ingenious plan by which the sale of gold was to be so regulated
that the Bank was to be free ' in normal circumstances from
the task of supplying gold for non-monetary purposes.' 4
This was evidently a departure from the orthodox theory
which makes no distinction between one kind of gold demand
and another. But its justification in the eyes of the Com-
mission was the unusual extent to which India was accus-

' See above, pp. 9 et seq.
8 See above, p. 14.

3 See below, pp. 36 et seq.

4 For the method by which this was to be secured see the Royal Currency
Commission Report, 1926, paras. 64 and 150.

CURRENCY COMMISSION OF 1925-26 AND AFTER 29

tomed to absorb gold for social purposes and for the purpose
of hoarding.

Thirdly, the Gold Standard Act of 1925 did not demonetise
gold in England, although it did deprive the people of their
right to get gold coins in exchange for gold bullion. The
legal tender quality of the sovereign and half-sovereign was
proposed to be taken away in India. But with a view to
making the gold standard visible to the ordinary public, it
was proposed to offer ' on tap ' savings certificates redeemable
in three or five years in legal tender money or gold at the
option of the holder. 1

Fourthly, all silver coins in England continued to be legal
tender up to 40 shillings only. In the Indian system the
rupee and half-rupee were to continue to be legal tender
without limit and other silver coins to the extent of one
rupee. It is sometimes erroneously believed even by those
who ought to know better that the proper position of a rupee
under a gold standard is not to be unlimited legal tender.
As a matter of fact, it is only by accident that the silver
coins in England are limited legal tender. Like the Indian
rupee the English half-crown might well have been unlimited
legal tender without causing the least trouble or incon-
venience. 2

Finally, the basis of the issue of paper currency in England,
regulated by the Currency and Bank Notes Act of 1928, is a
fiduciary limit of 260,000,000 which can be temporarily
exceeded in cases of emergency subject to the permission of
the Treasury. 3 Paper currency in India was to be issued by
a Central Bank and was no longer to be convertible by law
into a silver token currency. Again in conformity with the

1 For details see Royal Currency Commission Report, 1926, paras. 67-68.

8 Money, by E. Cannan, 1929, pp. 32-33.

J The principle of fiduciary issue in its application to England is well
explained in the Report of the Committee on Finance and Industry (Cmd.
3897), 1931, pp. 138 et seq. Since the passing of the Act of 1928, an in-
crease in the fiduciary issue by 15,000,000 was for the first time permitted
by the Treasury in 1931 (vide the Bank of England's announcement of
ist August, 1931).

30 THE MONETARY PROBLEMS OF INDIA

English practice, the Paper Currency and Gold Standard
Reserves were to be unified into one, but unlike England the
old system of fiduciary note issue was to be given up, and,
in keeping with the American and Continental practice,
there was to be a proportional reserve system instead. 1
Gold and gold securities were to form 40 per cent of the new
reserve, subject to a temporary reduction with the permission
of Government on payment of a tax. 2

3. ATTEMPTS AT KEFORM.

Proposed Currency and Banking Legislation, 1927. Three
bills embodying the Currency Commission's recommendations
were introduced in the Indian Legislative Assembly on the
25th January, 1927. They were (i) the Currency Bill ' to
amend the Indian Coinage Act of 1906, and the Indian Paper
Currency Act of 1923, and lay certain obligations on Govern-
ment in regard to the purchase of gold and sale of gold ex-
change' ; (2) the Gold Standard and Reserve Bank of India
Bill ' to establish Gold Standard and Reserve Bank ' ; (3) the
Imperial Bank of India (Amendment) Bill. 3

3. (A) THE RESERVE BANK BILLS, 1927 AND 1928.

The Reserve Bank of India Bill, 1927. Taking the proposed
banking legislation first, the Reserve Bank of India Bill of
ig27 4 closely followed the recommendations of the Currency
Commission in that regard and provided for a shareholders'
institution. Members of the Indian legislature, both central
and provincial, and representatives of commercial banks
were specifically excluded from the directorate of the Bank.

1 The Macmillan Committee in England favoured a maximum per-
missible fiduciary issue of ^400,000,000 and a minimum gold reserve of
^75,000,000 subject to deviation in exceptional circumstances. (Cmd.

3897. I93L PP- Mi- 2 -)

2 Royal Currency Commission Report, 1926, pp. 50 et seq.

3 Legislative Assembly Debates, India (Official Report), vol. i., 25th
January, 1927, pp. 59 et seq.

4 Its full title was ' Gold Standard and Reserve Bank of India Bill/
but attention is confined to the Reserve Bank scheme here.

CURRENCY COMMISSION OF 1925-26 AND AFTER 31

The Bill fixed the share capital of the institution at R. 5
crores, as recommended by the Commission, and gave it the
sole right of note issue for twenty-five years, subject to
renewal. With a view to compensating the Imperial Bank
of India for some of the privileges it was required to give up,
the Imperial Bank (not the shareholders, as was recommended
by the Commission) was given the option of subscribing
30 per cent, of the capital of the new Reserve Bank. The
central board of the Imperial Bank agreed to the offer,
particularly in view of the fact that, by the Imperial Bank
of India Amendment Bill, the Imperial Bank was to be
released from the existing limitations on its business at the
London branch and to be permitted to open branches out-
side India, not only in London, but also elsewhere. At the
same time its powers with regard to its internal business
were to be increased and the restriction on foreign exchange
business removed.

The Bill was referred to a Select Committee in which the
conflict raged mainly on two points viz., whether or not
it should be a shareholders' bank, and whether it was really
desirable to debar members of the legislature from becoming
directors of the institution. As for the first point, there can
be no question that a Central Bank is usually a shareholders'
bank, the exception being in small countries like Latvia
and Finland. 1 But the more important argument for a
shareholders' institution is the assumed undesirability of
Government management which cannot be avoided if it is
a State and not a shareholders' bank. It is also claimed
that the shareholders' management is most efficient, but to
those who know the working of joint-stock companies it
must be apparent what interest the shareholders themselves
take in the business and how little voice they actually have
in its working, which is really controlled by the directors.

1 Central Banks, by Sir Cecil H. Kisch and Miss W. A. Elkin, 1932, pp.
43-44-

32 THE MONETARY PROBLEMS OF INDIA

The main objection to the shareholders' scheme, however,
was rooted in the fear that a shareholders' bank might get
into foreign hands to the prejudice of Indian interests. On
this point the Government tried its best to accommodate
Indian opinion. 1

But the management of the bank was a vital matter on
which compromise was difficult. Government insisted, and
quite rightly according to the generally accepted principle of
sound central banking, that the central bank of the country
should be free from all political influence. 2 Indian opinion
was equally insistent that in the peculiar conditions of the
country and with the Governmental mistakes of 1920 still
fresh in the public mind, representation of the Indian
legislature on the Central Bank of the country should not be
altogether absent. A deadlock ensued.

The New Reserve Bank Bill, 1928. On the ist February,
1928, Sir Basil P. Blackett, the Chancellor of the Indian
Exchequer, sought to introduce a new Bill, as a result of his
cold weather (1927) consultations with the India Office.
The new Bill, while retaining the share capital as the basis
of the proposed reserve bank, was intended to meet the
wishes of the Indian legislature in several ways. In the first
place, with a view to avoiding the concentration of capital
in a few hands and providing its distribution as widely as
possible, the Bill laid down that no person, either individu-
ally or jointly, was to hold bank shares worth more than
R. 20,000, and preference was to be given to applicants
for a single share of R. 100. In the second place, in order
to emphasise the democratic character of the institution, no
shareholder, whatever the amount of his or her share, was
to have more than one vote. In the third place, in order to
prevent the shares from passing into the hands of foreigners,

1 Vide Sir Basil P. Blackett's assurance : ' May I say that I shall be
perfectly willing to add to the draft amendments I have that no one who
is not an Indian or a British subject ordinarily resident in India should
have a vote.' (Legislative Assembly Debates, India (Official Report), vol. iv.,
3oth August, 1927, p. 3659.) 2 Kisch and Elkin, op. cit., p. 61.

CURRENCY COMMISSION OF 1925-26 AND AFTER 33

shares were to be allotted only to Indians, British subjects
domiciled or ordinarily resident in India, and Indian corpora-
tions or British companies with a branch in India. In the
fourth place, in accordance with the suggestion of the com-
mittee which had considered the earlier Bill and which
wanted the profits to be limited to 6 per cent., and in super-
session of the recommendation of the Commission, which
had put it at 8 per cent., the new Bill provided for the
limitation of the dividends to 5 per cent, per annum unless
the surplus available, after provision for dividends, exceeded
four crores of rupees, with a maximum distribution on the
shares of 7 per cent. Lastly there was an important pro-
vision, with a view to securing the shareholders' representa-
tion on the management of the new bank, that they were to
elect from among themselves ninety-two delegates for five
years and these were to select eleven directors out of a total
of twenty-four, 1 The new Bill proved still-born. The
President of the Assembly did not permit the Bill to be
introduced since the previous Bill of 1927 was already before
the house. 2 Government, therefore, proceeded with the
former Bill and tried to pass it with certain amendments,
but the effort to establish a reserve bank failed in 1928-29.

3. (B) THE CURRENCY ACT, 1927.

The Currency Bill of 1927, however, had better luck than
the Reserve Bank Bills. The former was passed by the
Indian legislature into an Act, but with one important
emendation that the obligation placed on Government was in
regard to the purchase of gold and sale of gold or sterling
and not gold exchange as originally proposed. The Act
received the assent of the Governor- General on the 26th
March, 1927, and came into force from the ist April, 1927.

1 Gazette of India, i4th January, 1928.

2 Legislative Assembly Debates, India (Official Report), vol. i., ist Feb-
ruary, 1928, pp. 73-77.

3

34 THE MONETARY PROBLEMS OF INDIA

As the Currency Act of 1927 was only an amending Act, the
following analysis of the position created by it may prove
useful.

(1) The silver rupee, the silver half-rupee and currency
notes were all legal tender without limit, but open to issue
at the will of Government. The parity of exchange was
8-47512 grains troy of fine gold per rupee. (Sections 2, 4
and 12, and 3 of Acts VI. of 1903, III. of 1906, and IV. of
1927 respectively.)

(2) Gold coins were no longer legal tender, but could be
received at any Government currency office and at any
Government Treasury other than a Sub-Treasury as bullion
at the rate of 8-47512 grains fine gold per rupee. (Section 2
of the Currency Act, 1927.)

(3) Gold in the form of bars containing not less than forty
tolas (15 oz.) fine could be offered for sale in unlimited
quantities to Government at the Bombay Mint, 1 and Govern-
ment was under a statutory obligation to buy gold at the rate
of R. 21. 3a. lop. per tola fine. (Section 4 of the Currency
Act, 1927.)

(4) For the first time holders of legal tender currency
i.e., silver rupees and paper notes were entitled to obtain,
on application to the Controller of the Currency, Calcutta,
or the Deputy Controller of the Currency, Bombay, either
gold at the Bombay Mint or, at the option of Government,
sterling for immediate delivery in London, provided they
demanded and paid for an amount of gold or sterling of
not less value than 1,065 tolas (400 oz.) of fine gold. The
purchase price fixed for gold was R. 21. 3a. lop. per tola of
fine gold. As for sterling, R. 21. 3a. xop. was to buy as much
sterling as was ' required to purchase one tola of fine gold in
London at the rate at which the Bank of England ' was
* bound by law to give sterling in exchange for gold, after

1 Or 'any other place notified in this behalf by the Governor-General
in the Gazette of India ,' but no other place has yet been so notified.

CURRENCY COMMISSION OF 1925-26 AND AFTER 35

deduction therefrom of an amount representing the normal
cost per tola of transferring gold bullion in bulk from Bombay
to London, including interest on its value during transit/
(Section 5 (i) and (2) of the Currency Act, 1927.)

As the latter rate was bound to vary, the Governor-
General in Council had to notify from time to time the rate
determined as above in the Gazette of India. (Section 5 (3)
of the Currency Act, 1927.)

Review of the Position during 1927-31. Since Govern-
ment had the option of giving sterling and not gold in
exchange for rupees an option which they actually exercised
the monetary standard of India, as created by the Currency
Act of 1927, was, strictly speaking, a sterling exchange
standard. But it is fair to point out in parenthesis that so
long as sterling did not go off the gold parity, the sterling
exchange standard was as good or as bad as the gold exchange
standard. Further, if Government chose to exercise the
other option open to it of offering gold in exchange for
rupees, India would have had, in point of fact, if not in law,
a gold standard. Thus the standard of 1927, though a
sterling exchange standard, was capable of becoming a gold
standard, and certainly indicated that the gold standard was
the ideal of Government.

The new standard was superior to that of 1898-1916
inasmuch as there was a statutory gold parity for the rupee
and a statutory obligation on Government with regard to
the purchase of gold and sale of gold or sterling (itself based
on gold) . But the sterling exchange standard still retained
most of the old characteristics which had been condemned by
the Commission viz., the conversion of one token currency
(silver rupee) into another (paper currency), the duplication
of reserves, and the separation of currency from credit
control. The Currency Act of 1927 was never intended to be
the final currency legislation in India. It was to be supple-
mented by the other two Acts to which reference has already

36 THE MONETARY PROBLEMS OF INDIA

been made, but unfortunately they did not get enacted.
This, then, was the position in India until the recent currency
crisis.

4. THE CURRENCY CONTROVERSY OF 1926-31.

Ever since the passing of the Currency Act of 1927 further
agitation has mainly centred upon whether or not the
is. 6d. gold ratio has been the right ratio chosen for the
rupee ; the question of the establishment of a Gold Standard
and the Reserve Bank having somewhat receded into the
background.

Point of Controversy. The advocates of the is. 6d. ratio
denied that prices and wages had failed to adjust themselves
to the eight grain gold rupee by 1926; the opponents of the
is. 6d. ratio affirmed that the adjustment of prices and wages
to the eight grain gold rupee was still to come. Thus the
currency controversy was fairly begun.

But looking back to the last few years one thing is now
beyond dispute, and that is the loose grip of the rupee on
the is. 6d. gold ratio during the three or four years following
its formal introduction.

Exchange Weak in 1927. To bring out the weakness of the
exchange from the very start, no apology need be made for
the following somewhat lengthy quotation from a leading
financial journal of England.

' The advance 1 in the rate of the Imperial Bank of India on
February 10 came as a complete surprise, for monetary conditions
had been remarkably easy this season in India, and the Bank
had not made use of any part of its power to borrow more cur-
rency from the Government, which power became exercisable
to the extent of R. 4 crores with Bank rate at 6 per cent. It
appeared, however, that when the Bank desired to make use of
this power to the extent of R. 2 crores, it was charged 7 per cent,
instead of Bank rate on this occasion, so that unless it were
prepared to re-lend the money at a lower rate, the Bank was
obliged to advance its rate. Evidently the Government has changed
1 It was an advance from 6 to 7 per cent.

CURRENCY COMMISSION OF 1925-26 AND AFTER 37

its regulations 1 without making any public announcement, and it
would seem that this has been done as a part of the measures to
sustain the rupee exchange at is. 6d., for the rate had been showing
signs of weakness latterly, notwithstanding the increased demand
for money in India, and had an additional Rs. 4 crores of money
been released with Bank rate at 6 per cent., the tendency might
have been encouraged. The Government is evidently deter-
mined to maintain the is. 6d. rate, although the opposition to it
is strong in some quarters, certainly stronger than has been
thought in this country. . . / 2

Exchange Weak in 1928 and 1929. There is no denying the
fact that the Indian exchange was weak in 1928 and in the
early part of 1929, and Government was in a difficult position.
It had to provide for home remittances to the extent of
about 7,000,000 between i5th February and 3ist March
at a time when sterling bills in the market were difficult to
find. The Government had two alternatives before it,
either to ship gold or raise the price of money in India. It
chose the latter course and raised the rate of interest at
which it was prepared to give emergency currency up to
12 crores to the Imperial Bank of India from 7 to 8 per cent,
as from i4th February, 1930. The Bank had no option but
to raise its own rate accordingly. 3 Whatever may be said in
justification of the Governmental action, it certainly exposes
the weakness of the Indian monetary system in which
Government can openly interfere with the regulation of the
Bank rate an action bound to lead to much comment and
criticism.

Exchange Weak in 1930-31. Exchange was weak again
for the greater part of 1930-31. ' The middle of November
(1930) saw the beginning of a distinct change for the worse.
A period of consistent weakness set in which lasted until the
end of February. This was partly due to the fact that

1 The regulations referred to are given at p. 19 above.

2 The Bankers' Magazine, March 1927, pp. 431-2. The italics are mine.
* The Bankers' Magazine, March 1929, pp. 373-4.

38 THE MONETARY PROBLEMS OF INDIA

rumours were freely circulated to the effect that one of the
recommendations to be made at the Round Table Conference
which was to meet in London on the i2th November was
that a reversion should be made to the old statutory is. 4d.
ratio/ 1 The market was speculative, sterling to the extent
of 5,650,000 being sold between November 1930 and
March I93I. 2

Contraction of Currency, 1926-27 to 1930-31. The weak-
ness of the exchange coincided with and was presumably
corrected by the large contractions of currency which took
place between 1926-27 to 1930-31 . Figures of silver currency
are not available, but the net contraction of note currency
during the quinquennium was no less than R. 102*50 crores. 3
This is an unusually large figure, even if allowance be made
for the general fall in the price of commodities.

The public mind was much exercised, and the President of
the Indian Chamber of Commerce, Calcutta, in his letter
dated 26th November, 1930, to the Honourable Finance
Member, Government of India, complained that ' manipula-
tions of various kinds have been resorted to with a view to
create artificial stringency and unjustified high money rates
in India/ 4 On the 3rd February, 1931, Lala Rameshwar
Prasad Bagla asked the following question in the Legislative
Assembly : ' Is it a fact that manipulations of various kinds
were resorted to by Government with a view to maintain
and thereby justify the eighteen pence ratio ? ' The Honour-
able Sir George Schuster, Finance Member, replied : ' Govern-
ment in their capacity as currency authority, and in order
to maintain stability of the exchange value of Indian cur-
rency, have taken measures of the kind normally employed
by currency authorities in all countries with stabilised
currencies/ 5

1 Report of the Controller of the Currency for 1930-31, p. 14.

2 Ibid. 3 Ibid., pp. 20-21.

4 Report of the Indian Chamber of Commerce, Calcutta, for 1930, p. 194.

5 Legislative Assembly Debates t India (Official Report), 3rd February,

P- 55i-

CURRENCY COMMISSION OF 1925-26 AND AFTER 39

Position of Government. The position of Government was
clear. It was pledged to maintaining the is. 6d. gold rupee
and it could hardly be blamed for taking such measures as
were required to redeem its pledge. Doubts were set at
rest for the time being when the Secretary of State for India
made the following statement in the House of Commons on
the nth February, 1931 :

' The Government regard the rupee question as having been
settled in 1927, when the Indian legislature passed the Currency
Act by which the rupee was rated at is. 6d. gold. The Govern-
ment will use all the means in their power to maintain this rate
in accordance with their statutory obligations/ 1

5. THE CURRENCY CRISIS OF 1931.

A Critical Situation. The beginning of 1931-2 marked the
development of a critical situation. Firstly, the economic
depression, instead of showing signs of abatement, proved
still worse to India owing to the continued catastrophic
fall in the prices of its agricultural products with the conse-
quent decrease in the purchasing power and increase in the
real burden of debt of the Indian peasantry. At the same
time India's normally poor capacity to overcome the evil
consequences of an economic crisis had been appreciably
reduced by internal disunion and discontent. Attempts
were made to alleviate the position by remission of rent
and revenue, but the situation was too complicated to admit
of an easy solution. Secondly, the collapse of prices and trade
caused a serious deterioration in the Governmental budgetary
position. The situation was met partly by large short-term
loans in the form of treasury bills, which at the end of August
1931 were outstanding at the record figure of R. 83*4 crores,
and partly by a supplementary budget of taxation and re-
trenchment presented in September 1931. The budget re-
vealed that a fall in revenue of R. 19- 55 crores was feared. The

1 Report of the Controller of the Currency for 1930-31, p. 5.

40 THE MONETARY PROBLEMS OF INDIA

position was so serious that economies and taxation were
to extend to the end of the financial year 1932-33, and the
result then anticipated was that the year 1931-32 would
close with a deficit of R. 10*17 crores and the year 1932-33
with a surplus of R. 5*23 crores, leaving a net deficit of R. 4-94
crores. Thirdly, the exchange position was extremely un-
satisfactory owing to slackness of trade and lack of confi-
dence, which was responsible for the comparative failure
of the sterling loan floated at the end of May 1931.

The position was sufficiently serious: exchange sagged
to the lower gold point. On 27th June the Prime Minister
promised support of the British Government to Indian credit
and currency, but at that time the British Government was
itself experiencing difficulty in maintaining its credit and
currency on the gold basis. The flight from the rupee
could not be checked, investment in Indian treasury bills
on foreign account ceased, and there was a tendency to
repatriate the funds already invested. As a last resort
the Government of India had to sell nearly eleven millions
sterling to maintain the rupee at the lower exchange point
between the beginning of August and the igth September. 1

list September, 1931. The 2ist of September, 1931, will
go down to posterity as one of the most important dates in
the currency history of India and of many other countries.
It was on that day that the world witnessed the divorce of
the pound sterling from gold after a brief and unhappy
union of over six years. It was on that day again that
India had the uncommon experience of the promulgation of
a Currency Ordinance. And it was on that very day that
the Secretary of State for India announced the currency
policy of India in terms which were not in accord with the
Currency Ordinance. India was confused, but the con-
fusion lasted only three days, which were observed as Bank
holidays an event again unprecedented in the annals of

1 Report of the Controller of the Currency for 1931-32, p. n.

CURRENCY COMMISSION OF 1925-26 AND AFTER 41

Indian currency. On the 24th September, 1931, all specula-
tion and suspense ended with the issue of the Gold and
Sterling Regulation Ordinance of 1931.

Currency Ordinance of 1931. On 2ist September the
British Parliament passed the Gold Standard Amendment
Act and the pound sterling departed from gold. On
the same day the Government of India promulgated the
Currency Ordinance of 1931 (Ordinance VI. of the year). 1
The Ordinance runs as follows :

' Whereas an emergency has arisen which makes it expedient
that the Governor-General in Council should be relieved, while
the emergency continues, of the obligation imposed upon him
by Section 5 of the Currency Act, 1927, to sell gold or sterling
when demanded at rates therein fixed, it is hereby enacted as
follows :

(i) This Ordinance may be called the Currency Ordinance,

(2) Until the Governor-General in Council by notification in
the Gazette of India directs to the contrary, Section 5 of the
Currency Act, 1927, shall have no force.'

Since the Government was no longer under a statutory
obligation to convert gold into rupees and rupees into gold
or sterling, the rupee unless otherwise regulated could not
have remained fixed at is. 6d. gold or sterling, but would
have tended to find its own level in accordance with changed
circumstances.

Government Policy. On the same day that the Currency
Ordinance was issued, the Secretary of State for India
informed the Federal Structure Sub-Committee in London
that the policy of Government in regard to the position of
the rupee was as follows :

' . . . for all practical purposes the stability of the Indian
Exchange has been based on sterling. Indian trade is financed
through sterling. The greater part of India's external obliga-
1 Gazette of India, Extraordinary, 2ist September, 1931, p. 227.

42 THE MONETARY PROBLEMS OF INDIA

tions is in terms of sterling. To follow gold, and so increase the
sterling value of the rupee at this juncture is, I am sure you will
agree, out of the question. It has therefore been decided to
maintain the present currency standard on a sterling basis. I am
satisfied that this is the right course for India and is the most
conducive to Indian interests/ 1

The above policy being in conflict with the Currency
Ordinance of 1931, that Ordinance, as we have seen, was
repealed and another Ordinance was issued on the 24th
September, 1931, called the Gold and Sterling Sales Regula-
tion Ordinance. 2

Indian and English Currency Legislation, 1931. It is
significant that the Indian Gold and Sterling Sales Regula-
tion Ordinance of 1931 is very similar to the English Gold
Standard Amendment Act of 1931 in its main object of
maintaining the sterling paper standard by strict regulation
of dealings in foreign exchange and the consequent preven-
tion of the export of capital by nationals. This is manifest
from the following two extracts from official statements in
regard to England and India:

' . . . . The Government has no reason to believe that present
difficulties are due to any substantial extent to export of capital
by British nationals. They desire, however, to repeat emphatic-
ally warning given by the Chancellor of the Exchequer that any
British citizen who increases the strain on exchanges by pur-
chasing securities himself or assisting others to do so is deliberately
adding to the country's difficulties. . . .' 3

' . . . There has been evidence for some time of a desire
to convert rupees into sterling. The uncertain prospects
of such action are illustrated by what has just taken
place. Patriotic Indians, however, and all who are zealous for
India's well-being and constitutional progress, must realise the

1 Proceedings of Federal Structure Committee, Indian Round Table
Conference (Second Session), 1932 (Cmd. 3778), p. 77.

2 Gazette of India, Extraordinary, 24th September, 1931* PP- 229-30.
See Appendix II.

3 Extract from a statement issued by British Cabinet, 2ist September,

CURRENCY COMMISSION OF 1925-26 AND AFTER 43

importance of maintaining the stability of the currency. They
can help by standing by the rupee themselves and by urging their
friends to stand by the rupee as well. . . . n

Indian and English currency legislation differed, however,
in one material respect, inasmuch as sterling was completely
free while the rupee was tied to sterling.

Control of Exchange. The immediate objective of Govern-
ment policy was to maintain the sterling value of the rupee
at is. 6d., the immediate danger being the fear that the
Indians might lose confidence in the rupee and convert it
into foreign exchange. The situation was met by Govern-
mental control of exchange through discrimination in the
sale of foreign exchange. The Imperial Bank of India was
authorised to allocate exchange for certain definite purposes
and to refuse the sale of exchange for other purposes.
According to Ordinance VII. of 1931 sales of exchange were
limited to (i) normal trade requirements, excluding the
import of silver or gold coin or bullion and the liquidation
of the over-sold exchange position of any bank in respect
of any month subsequent to the month in which the demand
for gold or sterling might be made; (2) contracts completed
before the 2ist September, and (3) reasonable personal and
domestic purposes.

The Rules under the Ordinance (see Appendix II.) em-
powered a Managing Governor of the Imperial Bank to call
upon any recognised bank to satisfy him (i) that it had not
been selling foreign exchange for any purpose other than
those specified above, and (2) that it had been using all its
purchases of foreign exchange to cover its sales of foreign
exchange before making a demand on the Imperial Bank
for gold or sterling. In the event of a Managing Governor
being not so satisfied, he was authorised to suspend the
recognition of the bank up to seven days and report it

1 Extract from Secretary of State's speech before Federal Structure
Committee, London, 1932 (Cmd. 3778), p. 77.

44 THE MONETARY PROBLEMS OF INDIA

immediately to the Governor-General in Council. It must
be said to the credit of the exchange banks that they all
' readily co-operated in making this scheme of exchange
control effective/ Government was able to stabilise the
rupee at is. 6d. sterling, but was unable to satisfy public
opinion.

Public Opinion. Public opinion, as voiced by several
commercial bodies, was against the policy of linking the
rupee to sterling. For instance, on the 6th October, 1931,
the East India Cotton Association, Ltd., Bombay, at an
extraordinary general meeting passed the following resolu-
tion:

* That this extraordinary meeting of the East India Cotton
Association, Limited, strongly condemns the decision of the
Secretary of State for India as well as the Government of India
in linking rupee with paper sterling at i8d., inasmuch as this
decision works against the interests of Indian agriculturists,
commerce and industry in general, and cotton agriculturists in
particular. This meeting, therefore, resolves that the rupee be
left to seek its own value/

Opposition to the New System. The introduction of the
sterling exchange standard met with a strong objection from
the non-official members in the Indian Legislative Assembly.
They were naturally indignant that a momentous change in
the Indian monetary system had been made by the executive
without so much as consulting the legislature. But the
Finance Member explained how an emergency had arisen
in which immediate action was imperative and the previous
public discussion of the measures was not possible.

Public criticism of the new system, however, was not
merely sentimental, but was based on several serious con-
siderations. In the first place, the union of the rupee with
sterling involved the loss of its freedom for an uncertain and
instable career. For this very reason the recent Royal
Commission on Indian Currency had declared themselves

CURRENCY COMMISSION OF 1925-26 AND AFTER 45

against a sterling exchange standard, for they apprehended
that if ever sterling left the gold basis which happened to
be the case in September 1931 and began to depreciate,
1 Indian prices would have to follow sterling prices to what-
ever heights the latter might soar, or, in the alternative,
India would have to absorb some portion of such rise by
raising her exchange. India has had experience of both
these alternatives, and the evils resulting from them are
fresh in her memory.' 1

This leads to the second point, that in consequence of the
depreciation of sterling i.e., the increase of the sterling price
of gold there was danger of the depletion of India's gold
resources. Thirdly, India's import trade with countries
which continued on the gold basis was placed at a disad-
vantage as compared with those which had departed from
gold. With a rupee equal to is. 6d. sterling which bought
less American or French gold currency than before, it became
less profitable for an Indian importer to import goods from
America or France which were still on the gold standard
than, for instance, from England which had departed from
it. In this connexion the following statement of His
Majesty's Senior Trade Commissioner in India is both
relevant and self-explanatory.

' The linking of the rupee to is. 6d. sterling could not fail to
act as a powerful stimulus to India's exports to countries which
are still on the gold standard, among which are some of her
principal customers e.g., the United States, Japan, 2 Germany,
France and Italy. Conversely, the depreciation of sterling now
enables United Kingdom exporters to quote rupee prices below
those which in many cases can be quoted by manufacturers and
exporters in countries which still adhere to the gold standard,
notably Germany, Japan and the United States, who may be
regarded as our keenest rivals in the Indian market. Other

1 Report of the Royal Currency Commission, 1926, p. n.

2 Japan departed from gold in December 1931, and Japanese goods
have come into the country in very large quantities recently owing to the
advantage in exchange.

46 THE MONETARY PROBLEMS OF INDIA

things being equal, therefore, there should be in terms of rupees
a considerable advance in the prices of India's principal agricul-
tural products with a corresponding increase in the purchasing
power of the people. This increased purchasing power may be
expected to be reflected in a greater demand for imported goods.
It is to be hoped that the United Kingdom manufacturer, by
reason of this advantage in exchange, will take every opportunity
to secure an increased proportion of the trade available/ 1

The fourth and last point of criticism against the sterling
rupee is of considerable importance; it was ably put by
Mr. R. K. Shanmukham Chetty in the following words :

' The rupee is tied to the chariot wheels of sterling, and in
relation to gold it must follow the fortunes of sterling. I do not
anticipate that England will for ever remain off the gold standard.
It may be that after six months or one year or two years England
might think that the time had then come for her to go on a gold
standard again, and if such a thing happened in England, we will
also automatically go on the gold standard; with what conse-
quence ? Every country must restore the gold standard and fix
its currency in terms of gold with due regard to the economic
condition of that country. But under the present circumstances,
irrespective of the economic conditions of India, irrespective of
the intrinsic value of our currency, the moment the economic
conditions in England become propitious for the linking of
sterling to gold, we will automatically be linked to gold. That,
I submit, is a danger the possibilities of which are far-reaching
and the consequences of which I dread to imagine/ 2

Sir George Schuster, on behalf of Government, made a
reassuring statement regarding the preservation of the gold
reserves of the country. He admitted that India was placed
somewhat at a disadvantage in regard to her trade with gold
standard countries, but he pointed out that she was assured
of her trade with England. Moreover, her sterling obliga-

1 Report of His Majesty's Senior Trade Commissioner in India on the
United Kingdom Trade in India, 1931.

2 Legislative Assembly of India Debates, 26th September, 1931, vol. vi.,
p. 1068.

CURRENCY COMMISSION OF 1925-26 AND AFTER 47

tions both recurring, which amounted to 32 millions a
year, and non-recurring, which were 15 millions maturing
on the ist January, 1932, and another 7 millions later in
the year were too large to be ignored in determining her
currency policy. The alternative to the sterling exchange
standard was to let the rupee find its own level. ' On the
one side there is the policy of drifting, a chance of seeing
prices rise perhaps higher than they would have if we had
remained linked to sterling, but the danger that in order
to meet our recurring requirements we should have to draw
on our resources, and on the other side the comparative
stability of a sterling basis and the assurance of support
from His Majesty's Government/ 1 But the comparative
stability of sterling was disputed, and it Was felt that the
support of His Majesty's Government need not be dependent
on the linking of the rupee with sterling.

Course of Exchange. Happily, however, sterling and hence
the rupee did not depreciate so much as to justify all the
fears of the opponents to the new system, whereas the
maintenance of a is. 6d. gold value for the rupee would
have been disastrous. But this does not alter the principle.
Since August 1931 the British people themselves have not
been allowed to know on what principles sterling is con-
trolled. 2 The maintenance of a sterling exchange standard
therefore means that Indian currency is under the arbitrary

1 Sir George Schuster's speech in the Legislative Assembly of India
Debates, 26th September, 1931, vol. vi., p. 1093.

2 Mr. Chamberlain (Chancellor of the Exchequer) in a speech in the
House of Commons on the nth March, 1932, remarked:

' I do not deny that speculation in the meantime is disturbing and
possibly injurious to our trade., and I do not desire to see it continued
any more than I desire to see the pound at this time taking up a position
considerably higher than that at which it stood for some little time
recently. . . .

' I have no hesitation in saying that we do not desire to see the pound
forced up to a rate which will be injurious to industry, and I do not know
if the hon. and learned gentleman really wished to ask me to say what
was to be the ultimate policy, as I think it is apparent to the House
that at this time it is not possible to say what is going to be the ultimate
rate or the time at which it will be possible to stabilise the pound.'

4 8

THE MONETARY PROBLEMS OF INDIA

control of unknown men in no way responsible to India,
who do not even condescend to make any statement about
their intentions with regard to its future purchasing power
or gold value. This is not a situation with which India can
be content.

The actual course of exchange may be seen at a glance in
the diagram shown below.

450

400-

350

300

1931 1932

t. Oct. Nou. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept Oct. Nov. Dec.

'

1450

V400

350

250 1

Sept. Oct. Nou. Dec. Jan. Feb> Mar. Apr. May June July Aug. Sept. Oct. Nou, Dec.

1931 1932

[N.B. The above diagram has been constructed from figures given in The
Weekly Market Review, issued by Messrs. Premchand Roychand and
Sons, Bombay, beginning 4th September, 1931. The figures for the
25th September and and October are nominal.]

Effect on Indian Trade. The opinion of the Senior Trade
Commissioner in regard to the effect of the sterling rupee
on Indian trade has been given already. It is in strict con-
formity with economic theory. The more important thing,
however, is to see how far it is in accord with actual facts.
The table 1 on page 49 gives the index number of wholesale
prices in Calcutta and Bombay, and shows that the steep
fall in the commodity prices has been arrested.

Looking at the Indian trade returns, it is a matter of
some satisfaction that the exports of merchandise during

1 Indian Finance Year Book, 1932, p. 60.

CURRENCY COMMISSION OF 1925-26 AND AFTER 49

Calcutta (a) . Bombay (b) .

April, 1928

146

142

April, 1929

140

144

April, 1930

123

134

April, 1931

98

no

May, 1931

97

106

June, 1931

93

108

July, 1931

93

108

August, 1931 -

92

107

September, 1931

91

107

October, 1931 -

96

107

November, 1931

97

107

December, 1931

98

in

January, 1932 -

97

114

February, 1932

97

H3

March, 1932

94

112

(a) Indian Trade Journal

(1914=100);

(b) Bombay Labour

Gazette (1914=100).

December 1931 showed an improvement over those in
the preceding month. It is significant that no similar
expansion had been recorded in December of any year since
1926, and it seems probable that part of this improvement
might be due to the depreciation of the rupee in terms of
gold.

At the same time there has also been some diversion of
trade in favour of the British Empire and against foreign
countries. If trade statistics are analysed for the year
reckoned from the ist October, 1931, it appears that India's
imports from and exports to the Empire countries rose from
43-4 to 44*5 per cent, and from 40*8 to 46*7 per cent, re-
spectively, while her imports from foreign countries fell
from 56*6 to 55*5 and her exports from 59*2 to 53*3 per
cent. In the same period, India's imports from and exports
to the United Kingdom alone rose from 33-8 to 36*4 and 25*0
to 29*7 per cent, respectively.

Gold Exports. The outstanding feature of recent trade has
been the unusual export of gold, which amounted to over
17 crores in December 1931 alone. An idea of the magni-

4

50 THE MONETARY PROBLEMS OF INDIA

tude of the gold exodus since the union of the rupee with
sterling may be obtained from the following statistics i 1

Month and Year. Net Exports of Gold.

R.

October, 1931 - 8,56,16,434

November, 1931 - 8,30,43,371

December, 1931 ----- 17,46,58,625

January, 1932 - 9.07*26,339

February, 1932 - 7,43,20,223

March, 1932 ------ 6,73,47,330

57,57,12,332

A study of the foregoing table gives rise to two important
questions. Why has gold left India in such large quantities ?
How does it affect the interests of the country ?

Taking the first question, it is generally held that gold
exports have been due to the marked rise in the value of
gold. This, however, is only part of the explanation.
The Indian people are so conservative by nature and their
love for gold in the form of jewellery is so deeply ingrained
by age-long tradition that the allurement of higher prices
of gold by itself is not enough to draw out their hoards in
any large quantities. That a large portion of the gold sales
has been of melted ornaments and jewellery may be taken
as an indication of the fact that the sales have been due to
dire economic necessity. In other words, the bulk of the
people are now living on their past savings or capital. That
economic distress should have forced the Indian peasantry to
part with so much of their jewellery is deplorable; that they
should have obtained enhanced prices for it is a mitigation
of their misfortune.

This leads to the second question as to how the gold
exports affect India. On this opinion seems to be divided.
But some of the advantages which accrued from the sale

1 Report of the Controller of the Currency for 1931-32, p. 48. By the end
of 1932 the total gold export exceeded R. 100 crores.

CURRENCY COMMISSION OF 1925-26 AND AFTER 51

of gold are undeniable. In the first place, those who
parted with their gold stood to gain by the favour-
able rates at which they sold it. In the second place, the
export of gold tended to help in steadying the value of
sterling and therefore the value of the rupee. This, however,
would not have been necessary if the rupee were linked to
gold. In the third place, the export of gold helped Govern-
ment in paying off India's sterling debt of 15 millions
and thereby raised India's credit. Last but not least, the
folly of the undue regard for gold by countries which ought
to know better had then begun to be realised. But so long
as gold, for good or for evil, remained the basis of currency
and credit structure, it would not do for India to deplete
her gold resources to any appreciable degree.

Public ciiticism of the gold export was based on the fact
that while by the Gold and Sterling Regulation Ordi-
nance VII. of 1931, Government had intended to prevent the
export of capital by nationals and the withdrawal of short-
term funds by foreigners, this was to a certain extent set
at naught by the unchecked gold exports and private with-
drawal of foreign capital from India. According to the
Indian Finance, * Had the control over exchange been
tightened, and Government obtained all the remittances
resulting from gold exports and private merchandise account ;
and had they utilised the surplus over current Home Treasury
requirements in the repayment of the external debt, there
would have been some justification for Government's policy
of laissez faired If, on the other hand, gold exports had
been totally prohibited and gold had been bought by
Government freely at prices based on the London-New York
cross rate, 'the net effect was bound to have been a con-
siderable accession of strength to the Reserve position. The
advantages of this policy from the point of view of future
monetary reform are obvious, as it would have enabled the

1 Indian Finance Year Booh, 1932, p. 43.

52 THE MONETARY PROBLEMS OF INDIA

Government to establish the Reserve Bank with ample
resources at any time they think it fit to do so.' 1 Govern-
ment's objection to the adoption of such a course the Indian
Finance called it a ' theoretical objection ' was that ' the
currency authority should not acquire gold at a higher
price than that fixed by statute, and that any purchases in
contravention of this rule would amount to an unwarrant-
able speculation in gold.' 2

Gold and Government Finance. In the foregoing dis-
cussion, one point requires separate elaboration, as it has
failed to receive adequate attention. The matter relates
to the part gold exports have played in financing India's
external liabilities, and will be manifest from an examination
of the following trade statistics for the last three years.
These statistics, even at a glance, make sad reading, but
a little analysis will reveal that they are much worse than
they at first sight appear.

Imports. (In lakhs of rupees.)

1929-30. 1930-31. 1931-32.

Private Merchandise - 2,40,80 1,64,79 1*26,37
Gold and Silver - - 27,60 26,71 7,22

2,68,40 1,91,50 i,33,59

Exports.

Private Merchandise - 3, 17,93 2,25,64 1,60,55
Gold and Silver - - 1,48 2,31 62,61

3,19,41 2,27,95 2,23,16

The total imports of private merchandise in 1931-32 were
less by R. 38 crores (23 per cent.) as compared with 1930-31
and by R. 114 crores (47 per cent.) as compared with 1929-30,
while the exports were less by R. 65 crores (29 per cent.)
than those in 1930-31 and by R. 157 crores (49 per cent.) than

1 Indian Finance Year Book, 1932, p. 43. * Ibid.

CURRENCY COMMISSION OF 1925-26 AND AFTER 53

those in 1929-30. Thus both imports and exports the
latter more than the former were nearly halved in three
years, with the result that the excess of Indian exports over
imports was more than halved; it fell from R. 77,13 lakhs
in 1929-30 to R. 60,85 lakhs in 1930-31, and to R. 34,18 lakhs
in 1931-32.

This was a very serious matter for India. As is commonly
known, she has every year large sterling liabilities to meet,
but her excess of exports of private merchandise over
imports in the past used to be adequate not only to meet
these liabilities, but also to satisfy her annual demand for
the precious metals. If the latter had but remained at the
same figure in 1931-32 as it stood in 1930-31 or 1929-30,
India could not have met all her sterling liabilities without
recourse either to the use of the Gold Standard Reserve or
to the raising of sterling credits or both.

As it happened, during 1931-32, not only did India prac-
tically give up her usual demand for gold, but she commenced
parting with the yellow metal in unheard-of quantities.
In 1929-30 and 1930-31 her net takings of gold and silver
amounted to R. 26 crores and R. 24 crores respectively.
In 1931-32 her net givings were to the extent of R. 57 crores
involving a total sacrifice of R. 81 crores, if compared
with 1930-31, and of R. 83 crores, if compared with 1929-30.

Thanks to this unique change in India's attitude towards
gold, the visible balance of trade in India's favour, at the
end of the financial year 1931-32, amounted to R. 90 crores
as against R. 51 crores in 1929-30 and R. 37 crores in 1930-
31. Government was able to satisfy all sterling obliga-
tions with perfect ease : the position from this point of view
looked extremely satisfactory.

But there is another way of looking at the picture. Until
1930-31 the Indian trade position was such that her normally
favourable trade balance was made up of large exports of
private merchandise; since 1931-32 the position is that her

54 THE MONETARY PROBLEMS OF INDIA

abnormally favourable balance is made up of large exports
of gold which have filled the place of private merchandise
of a corresponding value. Granting that gold is also a
commodity and gold exports per se need not be undesirable,
the position is not that exports of private merchandise are
being maintained at the old level and in addition gold is
being exported. The position is that both imports and
exports are at a much lower level than before, and gold
exports are for the time being masking an otherwise extremely
unsatisfactory state of affairs.

This is an impossible situation. How long can it last ?
Assuming that the price of gold will continue to be high
although by no means a certain proposition the gold
holdings of the people which economic forces can compel and
high profits can tempt them to part with are not unlimited.
Gold exports are at best only postponing the evil; when
they cease, and it should not be very long before they
cease, a situation of the gravest character will arise, if
things are allowed to drift in the mere expectation of inter-
national action leading to world prosperity.

Cancellation of Ordinance VII. While the gold exports
have attracted so much public attention, the cancellation
by Government of Gold and Sterling Regulation Ordi-
nance VII. of 1931 on the 3ist January, 1932, has passed
almost unnoticed. This means that the Currency Act of
1927 has again come to life, but so long as sterling is not
on the gold basis, there is no change in the monetary standard
which continues to be the sterling exchange standard. The
object of the cancellation of the Ordinance presumably was
to allow free transactions in exchange and to facilitate the
export of gold from India.

CHAPTER III
THE MONEY MARKET (A), 1926-32

I. INDIGENOUS BANKERS. 1

Meaning of Indigenous Bankers. The term ' indigenous
bankers/ or ' indigenous banks/ is commonly used to imply
all kinds of private bankers and moneylenders or banking
and moneylending firms. In my book on Indigenous Bank-
ing in India (pp. 1-3), the distinction was made for the first
time between ' bankers ' and * moneylenders ' a distinction
which has been utilised by the Indian Central Banking
Inquiry Committee, 1929-31, in its report (para. 107). The
term ' banker ' is taken to mean any individual or private
firm which, in addition to making loans, either receives
deposits or deals in hundis, 2 or both, each of which functions
clearly belongs to the province of banking, while the term
' moneylender ' is used for any individual or private firm
which makes loans, but does not usually receive deposits or
deal in hundis.

Moneylenders, again, must not be confused, as they some-
times are, with mere investors. If a person deposits his
savings in a bank or lends for use, not as a regular business
but merely to add to his principal income from other sources,
he is not a moneylender but a mere investor. On the other
hand, if a person lends his funds in order to earn interest

1 Some, but only some, of the matter of this section is based on my
Indigenous Banking in India, London, 1929. The rest is entirely new
material, most of which was collected by me during 1929-30 as Secretary
of the United Provinces Banking Inquiry Committee. I am indebted to
Government for permission to use it.

2 The hundis are Indian bills of exchange.

55 -utt

56 THE MONETARY PROBLEMS OF INDIA

as a regular business, he is a moneylender. There is thus a
distinction between an ' investor ' and a ' moneylender '
which must be kept in view, although it may well be that
the former may and does at times merge into the latter.

Numbers and Distribution. Bearing the above distinctions
in mind, the question of the number of bankers and money-
lenders and their geographical distribution is of great interest
and importance, though actual statistics are not available.
In the Indian Census the classification according to occupa-
tions contains no separate groups entitled ' bankers ' and
'moneylenders/ All that we find are the statistics of the
total numbers (including employees) engaged in banking,
moneylending, and allied activities. Bank managers, money-
lenders, exchange and insurance agents, money-changers
and bankers, are enumerated in one group. The provisional
numbers of this group for 1931 are 329,482. l

The recent provincial banking inquiry committees might
have produced some reliable data, but in this respect their
reports are generally disappointing. Such statistics as these
committees have been able to collect for the various provinces
are hardly comparable, since the estimates are not arrived
at on one basis. Nevertheless, the table 2 on page 50 is not
without some interest.

Structure and Organisation: Classification. The indigenous
bankers and moneylenders lack the organisation of moderi)
banks. Broadly speaking, it may be said that they have no
comprehensive organisation at all. They have developed
gradually, and their development has varied in accordance
with the local requirements, habits, customs and traditions
in different parts of the country. 3 They defy a clear-cut
classification, but if they must be classified there are two

1 The new Census Report is not yet published. I am indebted for this
tentative figure in advance to the Census Commissioner.

2 Report of the Indian Central Banking Inquiry Committee, 1931, pp. 72
and 94.

3 Bombay Provincial Banking Inquiry Committee Report, 1920-30, para.
253.

THE MONEY MARKET (A), 1926-32

57

Province.

Bankers.

Moneylenders.

Population,
I93I- 1

Assam

_

__

8,622,251

Bengal

A few

45,000 (b)

50,122,550

Behar and Orissa

_

100,000 (besides about

37.590,356

700 Shroffs and urban

moneylenders paying in-

come - tax and many

more not paying it)

Bombay

20,000 (including bank-

22,259,977

ers)

Burma

16,500 Chettiyar

14,665,618

offices

Central Provinces

One firm habit-

43,000 (b)

15,472,628

ually receiving

deposits

Madras

46,748,644

Punjab

66 based on in-

55,ooo

23,5^0,851

come-tax figures

United Provinces -

250 (including

48,408,763

seven firms

working on

modern lines)

Ajmer Marwara -

29(a)

100 (bankers and money-

560,292

lenders paying income

tax)

Delhi -

43 ()

100 (bankers and money-

636,246

lenders paying income

tax)

North-West Fron-

29 Hindus and

100 (bankers and money-

2,425,076

tier Province

many Muslims

lenders paying income

tax)

N.B. ' ' indicates that no information is available.

(a) Not reliable as the definition of the term ' banker ' is not

observed.

(b) Estimate based on Census statistics of the group bankers, etc.

ways in which a classification may be attempted: (i) accord-
ing to their clients, and (2) according to their business.

Taking the first basis first, both bankers and moneylenders
may be divided into two classes: (i) urban bankers and
urban moneylenders, or those who do business mainly with
the townsfolk, and (2) rural bankers arid rural moneylenders,
or those who do business mainly with the villagers.

On the second basis, i.e. according to their business,
bankers may be subdivided into (i) bankers (including

1 Supplement to the Gazette of India, i9th September, 1931, pp. 562-3.

58 THE MONETARY PROBLEMS OF INDIA

the Shroffs of Bombay) working on antiquated lines, and
(2) bankers working on modern lines.

To classify moneylenders according to their business is
not easy, but taking into account their principal work,
they may be broadly divided into seven categories :

' (i) Pakka moneylenders, or those who advance on the security
of registered documents e.g., mortgage deeds.

(2) Kachcha moneylenders, or those who advance on the security
of other than registered documents e.g., promissory notes.

(3) Pawnbrokers and goldsmiths, called choksis or sarrafs in
Bombay, or those who lend against ornaments and valuables.
Pawnbroking is a monopoly of the Chinese in Burma and is
largely practised by women in the United Provinces. 1

(4) Qistias, or those who lend on the instalment system (in-
cluding petty qistias, giving day-to-day loans called rozai).

(5) Military moneylenders, or moneylenders for military
regiments.

(6) Pathans, Kabulis, Rohillas, 2 Aghas or Moghuls, Harias or
Tharakkars? Atiths, Gossains or Nagas* all itinerant money-
lenders.

(7) Casual and amateur moneylenders, or those pursuing other
occupations and lending only surplus money e.g., pensioners,
widows, 5 labourers/ 6

Interconnexion. The interconnexion between these
various kinds of bankers and moneylenders is very slight.
Usually they work independently of one another. Im-
portant bankers have branches in different parts of their
provinces and even outside them. The branches are in
charge of munims or agents, whose honesty and integrity
are proverbial. 7 These munims act as links between their

1 I was struck by the large number of women pawnbrokers in the
districts of Meerut, Mozaflarnagar and Saharanpur which I visited.

2 Central Provinces Banking Committee Report, 1929-30, para. 591.
* In the United Provinces.

4 Behar and Orissa Banking Committee Report, 1929-30, para. 60.

5 Bengal Banking CommiUee Report, 1929-30, para. 404.

6 Ex-coolies in Assam regularly lend money. (A ssam hanking Committee
Report, 1929-30, para. 32-6.)

7 t/.P. Banking Committee Report, 1929-30, para. 420. The Central
Provinces Committee, however, observe in their report (para. 1946) that

THE MONEY MARKET (A), 1926-32 59

employers and the mofussil money markets, in so far as the
two have any links at all.

But if regular links in the chain of indigenous credit
agencies are lacking, it is significant that their place is often
taken by ties of communal brotherhood or blood relationship,
and the bankers and moneylenders are more closely knit
together than they outwardly appear. The Vaishya,
Marwari and Jain bankers, for instance, are ready to help
the members of their fraternity at all times. In Burma
' each Chettiar business is owned by a partnership of closely
related persons and managed by an agent. The partners
are commonly related to one another through their wives,
people who are related directly being more likely to set up
separate firms/ 1 It need hardly be added that a Chettiyar 2
firm always comes to the rescue of a sister firm in difficulty.

Modern Associations. While the bankers and money-
lenders all act independently, it is interesting to note that
in modern times 3 they have formed a few associations which,
within limits, are doing good work. In Bombay, for instance,
they have several well-organised associations viz., the
Bombay Shroffs' Association, the Marwari Chamber of
Commerce, the Commission Agents' Association and the
Multani Bankers' Association. In Rangoon also there is a
Marwari Association, 4 while Delhi has a Bankers' Panchayat
(Association) which meets at the house of Lala Shrikrishna
Gurwala, although he has ceased to be a banker. 5

Functions and Methods. The functions of a moneylender,

they heard complaints that the Munims ' take a certain portion of the
money lent as commission and also do not enter all repayments in their
books or give receipts.'

1 Burma Banking Committee Report, 1929-30, para. 458.

2 Chettiyar is only the honorific plural of Chetti. The Chettiyars of
Burma are Nattukottai Chettis from the Ramnad district of the Madras
Presidency. They have their agents in more distant countries than Burma
also.

3 For ancient guilds see my Indigenous Banking in India, pp. 39-40.

4 Burma Banking Committee Report, para. 428.

6 Centrally Administered Areas Banking Committee Report, 1929-30,
para. 209.

6o THE MONETARY PROBLEMS OF INDIA

generally speaking, consist in making advances. He lends
money, corn, seeds, or cattle to agriculturists, or to persons
connected with land, on the security of produce or other
movables or of immovables, or on no security other than
personal. He often makes advances against standing crops.
He also lends in cash or kind to persons other than agri-
culturists. An indigenous banker, in addition to carrying
on the operations of a moneylender, receives deposits, either
on current account or for fixed terms, on which he allows
interest, gives cash credit and deals in bills of exchange.
Some bankers who work on modern lines even issue pass-
books and cheque-books and cash and collect cheques, but
usually the cheques are of local validity only. 1

The share of the indigenous credit agencies in financing
large-scale industries is small, and in financing foreign trade
still less, but they are largely responsible for financing
agriculture, internal trade, and the small industries of the
country. Furthermore, some bankers act as Government
Treasurers, as Treasurers of Indian States and as Treasurers
and disbursing agents of the railways. 2

As regards the methods of finance, they are fully set out
in my book on Indigenous Banking, and their repetition
here would serve no useful purpose. But a few new
facts and recent tendencies may well be noted. Usually
the bankers finance industrial concerns, in so far as they
finance them at all, by (i) taking debentures, (2) subscribing
to the share capital, (3) advancing against the security of
shares, and (4) giving long-term loans against whole or part
of the property or goods. 3 Trade is financed by means of
cash, and less often by the drawing and discounting of hundis.

1 In Behar and Orissa some bankers working on old-fashioned lines also
issue indigenous pass-books called chithas on which the accounts of the
depositors are entered from time to time. (Behar and Orissa Banking
Committee Report, para. 376.) I have noticed the practice in the United
Provinces as well.

2 Central Areas Banking Committee Report, para. 198.

3 Bombay Banking Committee Report, para. 262.

THE MONEY MARKET (A), 1926-82 61

The latter is the principal business of the Kallidaikurichi
Brahmans in the Madras Presidency, of the Multanis in the
Madras and Bombay Presidencies, and of the Marwaris
and Gujmtis in Burma. A considerable portion of the
internal trade in those areas is financed in this way.

In their methods the Nattukottai Chettis or Chettiyars of
Burma and Madras seem to be the most advanced of all
bankers in the country. According to the report of the
Burma Banking Committee (para. 492), the Chettiyars
receive from their customers both current and fixed deposits,
and give to the current depositors either deposit receipts or
demand promissory notes. In addition a pass-book is
usually given in which sometimes the entries are made by
the customer himself and subsequently initialled by the
Chettiyar. In the more important towns cheques are issued
and used for making payments, and there is no difficulty
in their encashment, if arrangements with the bankers are
made beforehand. In the absence of previous notice the
current practice with the Chettiyar is to mark, date and
initial the cheque and return it to the presenter for a second
presentation on the following morning or afternoon, when
it is invariably paid. Since the nth June, 1930, the Chetti-
yars have even adopted the modern system of clearing
cheques drawn upon them. From that date the Bank of
Chettinad has obtained access to the clearing facilities pro-
vided by the Imperial Bank of India. 1

The methods of moneylending are varied. ' Rates of
interest, documents, incidental charges, the manner of re-
newal or repayment, all vary and not only in one direction.
They vary with the idiosyncrasies of the moneylender
himself, with the circumstances of the debtor, with the
nature of the security, with the locality/ 2 Small loans
may be had on a mere entry in the lender's bahikhata

4 l Burma Banking Committee Report, para. 494.
~ U.P. Banking Committee Report, para. 203.

62 THE MONETARY PROBLEMS OF INDIA

(account book) or on no entry at all, but a verbal promise
occasionally backed by an oath. This latter system is
called dadan 1 in Bengal and hath-udhar in most places.
But qistbandi loans, or loans on the kandu or qist or thandal
system, as they are variously known in the Madras
Presidency, have usually bonds of their own. 2 As the
amount of loan increases and greater security is sought,
promissory notes or unregistered bonds, registered bonds
and mortgage deeds are executed. These, however, are
matters of common knowledge, and their details 3 need not
detain us. But a few words may be permitted in regard
to the interesting institution of pawnbroking.

Pawnbrokers. The pawnbrokers in India are as old as
the institution of ornaments itself, and they are spread all
over the country. It is an all-embracing trade which knows
no climate, sect or sex; its votaries exist everywhere, because
they satisfy a universal social want. The customers are
similarly drawn from all classes of people Indians and
Anglo-Indians, 4 Hindus and Mahomedans, agriculturists and
non-agriculturists.

The organisation of pawnshops seems to have found its
perfection in Burma, where they are worked mostly by
Chinamen under licences which are generally sold by auction.
The licensees are often paid employees and representatives
of a syndicate of Chinese capitalists who sometimes own
shops in more than one town. Some idea of the magnitude
of the business may be obtained from the fact that the
licence fees in 1928-29 amounted to R. 10,92,000. The
licensees borrow capital at 15 to 18 per cent, per annum,
and charge interest for loans up to R. 5 at one anna per
rupee per month, which is equal to 75 per cent, per annum,

1 Bengal Banking Committee Report, para. 408.

2 An illustration of such bonds is given in Indigenous Banking in India,
pp. 64-65. a Ibid., pp. 55 et seq.

4 Particularly in the Presidency towns. There are several pawnbrokers'
institutions in the Anglo-Indian quarters in Calcutta. (Bengal Banking
Committee Report, para. 206.)

THE MONEY MARKET (A), 1926-32 63

for loans above R. 5 and up to R. 20 at nine pies per rupee
per month i.e., 56 J per cent, per annum, for loans above
R. 20 at six pies per rupee per month i.e., 37^ per cent, per
annum. A part of a month is always counted as a full
month, the English calendar being in general use. As the
Burmese masses find the use of their own months more
convenient, the Burma Banking Committee suggests the
adoption of Burmese months in place of the English. 1

Bankers and Moneylenders and Modern Banks. With
regard to their methods, indigenous bankers and money-
lenders may be distinguished from modern banks in at least
two respects. First, both indigenous bankers and money-
lenders combine other businesses 2 with banking or money-
lending. The notable exceptions are the Nattukoltai Chettis
of Madras, the Multani bankers of Sindh and Bombay and
the Chettiyars of Burma. Secondly, neither the bankers
nor the moneylenders in their business stand on any formali-
ties at all. They are willing to accommodate their customers
on any day in the week and at all hours of day and night.
The indigenous banking holidays in India are fewer than in
any country in the world; they are confined to three days
in the year which mark the three greatest Hindu festivals
viz., Dasehra, Diwali (Bankers' New Year's Day) and Holi
and fall in the months of September or October, October
or November, and March respectively. The pleasant
manners, alertness and personal interest of the bankers and
moneylenders alike are invaluable assets which are lacking
in the case of modern Indian joint-stock banks. 3

Bankers and Moneylenders and Indian Joint-Slock Banks.
The rural moneylenders have no connexion at all with the

1 See Burma Banking Committee Report, paras. 567-76, on which the
above account is based.

2 There are a host of these allied businesses e.g., trade and commerce,
dealings in grain or gold, etc. (See Indigenous Banking in India,
pp. 43-450

3 On the other hand, the Punjab Banking Committee remark that the
indigenous bankers are not as prompt in their methods as a bank. (Report
of the Committee, 1929-30, para. 188.)

64 THE MONETARY PROBLEMS OF INDIA

Indian joint-stock banks. The relations of the bankers
and urban moneylenders with the joint-stock banks vary
in different places in accordance with different circum-
stances. More often than not they are rivals in business.
The bankers and moneylenders go to the banks only as a
last resort, when their own resources are exhausted and other
bankers will give no further credit. The bankers complain
that the banks, including even the Imperial Bank of India,
do not treat them as ' bankers ' but as mere ordinary
customers, that they allow them neither preferential rates
nor sufficient accommodation for their status, and that
annoying inquiries are secretly made respecting their credit
position. The banks, on the other hand, urge that it is
very difficult for them to distinguish between a genuine
banker and a mere trader or speculator, or to assess the true
financial position of a banker, when he does not publish
a balance sheet or refuses to disclose his accounts.

Decline of Indigenous Banking, 1926-32. It is signifi-
cant that during the period 1926-32 the indigenous
bankers and moneylenders appear to have fallen on evil
days. Their decline is a slow process and therefore not
very obvious, but various causes both old and new have
combined, and there are clear indications that the decline
of indigenous banking has begun. In the first place, the
bankers and moneylenders have had continually to labour
under various difficulties legal and otherwise. They may
be responsible for some of them, but such difficulties, never-
theless, act as a discouragement to their trade. The main
difficulty is with regard to the repayment of loans. Legal
recovery of debt is admittedly expensive. Not only are
the court expenses high, but the process of execution of
the decree is both lengthy and costly. This is not all.
Some Acts of the Indian legislature passed with a view to
protecting the borrowers' interests have, in actual practice,
operated to the hardship of the lenders. Cases are not

THE MONEY MARKET (A), 1926-32 65

wanting in which the borrowers borrow funds with no
intention of repaying them, and take shelter behind the
Insolvency Act. Again, bankers and moneylenders hesitate
to lend to the people protected by the Bundelkhand Land
Alienation Act, because it is not easy to realise their dues
from such borrowers. Last, but not least, indigenous
bankers are without the legal facilities permitted under the
Bankers' Evidence Act.

In the second place, the competition of other credit
agencies affected the indigenous bankers and moneylenders
more seriously during 1926-32 than perhaps in any preceding
period. It has already been noted that the joint -stock
banks and the Imperial Bank of India do not recognise the
indigenous bankers as such, and that the latter depend,
for the most part, on their own resources. Both the ex-
pansion of joint-stock banking by the opening of 100 new
branches by the Imperial Bank of India 1 (between 1921 and
1925), and the expansion of co-operative credit societies from
80,182 to 106,166 between 1925 and I93I, 2 have tended to
depress the activities of the bankers and moneylenders in
the period under review. To give only one illustration,
the competition of the new branches of the Imperial Bank
has been keenly felt by the indigenous bankers in the
mandis (marts) of Khurja, Hapur and Hathras. 3

In Burma there has been no decline in the Chettiyars'
business, but competition has arisen not so much from
modern joint -stock or co-operative banks as from the Indian
and Chinese moneylenders of the old type. There is no
town in Burma without an Indian, and he represents all
races including Gurkhas in Maymyo and the north. 4 ' In the
last twenty or thirty years Chinese lenders have appeared
practically all over the country, in towns and in villages,

1 See below, p. 118.

2 See below, p. 74.

3 Centrally Administered Areas Banking Committee Report, para. 211

4 Burma Banking Committee Report, para. 559.

5

66 THE MONETARY PROBLEMS OF INDIA

and now lend a considerable amount either as ordinary
moneylenders or as pawnbrokers. Nearly all pawnbroking
is done by Chinese ; and the number and business of pawn-
brokers have increased rapidly in the last twenty years,
particularly so in the last eight or ten.' 1

The relationship between the bankers and moneylenders,
on the one hand, and the borrowers, on the other, has for
some years undergone a perceptible though gradual change
for the worse. This is partly owing to the rise and ex-
pansion of new credit agencies and partly owing to changes
in the legal system. The strict administration of justice
often harms the creditor, and the old panchayat system with
all the esprit de corps and solidarity of the village life that
it implied has degenerated. The recent nationalist move-
ment, by increasing the general consciousness of the people,
and the present economic depression, by reducing their
capacity to repay old debts, while increasing the burden
of such debts, has had the effect of setting the debtors
against the creditors. This is shown by an increase in crimes
against the property and persons of moneylenders at a time
when the cult of non-violence has been most widely preached
in the country. In the Punjab, where the moneylenders
are mostly Hindus and the borrowers are mostly Mahome-
dans, the recent communal animosity has to some extent
aggravated the action of purely economic factors in widening
the gulf between the private creditors and their customers.

This estrangement between borrower and creditor means
not only loss of business to the latter, but threatens to
strike at the very foundations of the old village economy
in which the moneylender has hitherto played such an
important and indispensable part. The increasing desire
on the part of the borrowers to loosen the moneylenders'
hold is manifesting itself, but so is also the consequential
endeavour on the part of the creditor to stiffen that hold in

1 Burma Banking Committee Report, para. 559. The italics are mine.

THE MONEY MARKET (A), 1926-32 67

various ways. That the bankers and moneylenders are
losing ground in spite of all their efforts is now obvious to
the students of Indian banking. What is less clear to many,
and therefore needs emphasis, is the change which is taking
place in the methods of business of these private credit
agencies a change sometimes for the better and sometimes
for the worse.

Informality, which used to be the main virtue of an in-
digenous lender, is giving place to formalities which the
borrower does not like. The peripatetic moneylenders in
Bengal who at one time lent on mere verbal promises to pay
are now seen using printed books containing pro-notes in
English on which the signature or thumb impression of the
borrower is taken. J In many places the village sowcar has
been replaced.

On the other hand, in some areas, the practice of lending
money on the security of standing crops has now practically
disappeared. 2 Further, loans are generally issued and
repaid in cash. The system of repayment in kind is fast
dying out. 3 Above all, some bankers are shedding their
out-of-date methods and beginning to work on modern lines.
They transact all kinds of business which a modern joint-
stock bank does e.g., issue pass-books and cheque-books,
cash cheques, collect and discount bills, etc. There are
seven such modern banking firms in the United Provinces, 4
while the movement has had a striking illustration in the
Madras Presidency in the registration of the Bank of Chetti-
nad in September 1929. It has been started with a sub-
scribed capital of R. 2 crores and a paid-up capital of R. i
crore and has already established about forty branches in
India, Burma and Ceylon. According to the Madras
Banking Committee Report (para. 58), 'The object of the

1 Bengal Banking Committee Report, para. 409.

2 The Central Provinces Banking Committee Report, para. 2043.

3 Ibid., paras. 2039-42.

1 United Provinces Banking Committee Report, para. 135.

68 THE MONETARY PROBLEMS OF INDIA

promoter of the bank is to adapt the indigenous system of
conducting banking business as far as possible to the joint-
stock system of banking on up-to-date and right channels,
and vest the management and control and direction in the
hands of skilled experts in the community to infuse greater
public confidence, to avoid evils incidental to individual
ownership and management and to establish the enormous
advantages resulting from a proper periodical audit on
up-to-date lines/

2. LOAN OFFICES, NIDHIS AND CHIT FUNDS.

Loan Offices. In addition to the indigenous bankers,
there are some old banking institutions viz., Loan Offices,
Nidhis and Chit Funds which come in between the ancient
bankers and modern banks. The loan offices in Bengal
date from as early as 1865. They are registered under the
Indian Companies Act and are owned and managed mostly
by the Bengalis. 1 Their number has almost doubled during
the last five years: it was 506 on the 3ist March, 1927, and
1,008 on the 3ist March, 1931. During 1930-31 their total
authorised capital amounted to R. 86,37,53,000, of which
R. 7,28,16,828 was issued and only R. 3,81,02,980 was paid
up. 2 There are not even two dozen loan offices with a paid-
up capital of R. i lakh or more; most of them have very
small paid-up capital and the reserve fund in the case of
newly-opened offices is strikingly low. No loan office has
issued debentures, funds are attracted by deposits only. 3
Interest on deposits varies from 4 per cent, on short-term
deposits to 8 per cent, for seven-years deposits, the usual
maximum period being five years.

N The memoranda of Associations of the loan offices are
known to include almost every conceivable item of business,

1 Bengal Banking Committee Report, para. 74.

2 Annual Report on the Administration of the Indian Companies Act,
1913, etc., in Bengal for 1930-31, p. 52.

3 Bengal Banking Committee Report, para. 438.

THE MONEY MARKET (A), 1926-82 69

but it does not follow that all businesses are actually trans-
acted. ' In a broad sense, all loan offices are banks, as they
attract deposit from the public and lend money. But in a
narrower sense, many of the loan offices are merely joint-
stock organisations for lending money, not to trade and
industry, but chiefly to landlords and tenants, often for
unproductive purposes/ 1

The main function of a loan office is to make advances to
zamindars as well as actual cultivators against mortgages
and ornaments or on personal security. New companies
charge interest from 12 to 56 J per cent, on secured loans and
12 to 112 per cent, on unsecured loans; old companies charge
considerably less than the preceding maxima.

Nidhis. The nidhis, like the loan offices, go back to the
middle of the nineteenth century 2 and arc all registered
under the Indian Companies Act a few as banks and the
rest as nidhis. On the 3ist March, 1929, there were 228
nidhis in the Madras Presidency, 3 which is their principal
home. Their working capital is about R. 4 crores, consisting
of R. 2\ crores as share capital and R. i J crores as deposits
and reserve fund. 4

Nicholson has put nidhis and chit funds together, but
they are distinct from each other. 5 The nidhis approach
to banks receiving deposits and making loans, while the
chit funds are merely associations for receiving subscrip-
tions and lending among themselves. 6

The main functions of the nidhis are to facilitate savings,
relieve members from old debt, and grant loans for all
purposes on good security. 7 Loans are given even to non-
members, provided the funds permit. Generally the nidhis
lend on share capital up to 90 per cent, of the paid-up share

1 Bengal Banking Committee Report, para. 75.

2 Madras Banking Committee Report, 1929-30, para. 72.

3 Ibid., para. 438. 4 Ibid., para. 440.
6 Ibid., para. 74.

6 Ibid. 7 Ibid.

70 THE MONETARY PROBLEMS OF INDIA

capital, to go per cent, of deposits, to 50 per cent, of the
value of jewels and 80 or 90 per cent, of the value of gold
or silver ornaments, to 75 per cent, of the value of goods
stored in godown and to 90 per cent, again of the value of
Government paper. 1

Usually the rates of interest charged are low e.g., 6J per
cent. but high penalties are exacted on repayments after
due date, which is a fruitful source of income.

Chit Funds or Chits. Somewhat analogous to the nidhis
are the Chit Funds or Chits, called kuries in Malabar. They
are to be found mostly in Travancore State and in the
neighbouring parts of the Madras Presidency. They illus-
trate a very old method of raising money. A number of
persons combine to make periodical payments to one of them
who is the promoter of the chit and takes the first collection
in full as his remuneration. Each successive collection is
given to one of the members of the chit on a number of
interesting plans, 2 the simplest being the system of rotating
lottery in which the members take the amount in rotation,
the order being decided by lots.

Chits deal not only in rupees, but sometimes for com-
modities like nuts, etc. For instance, ' they are run at the
shandies among the old women who sell vegetables and
make a contribution weekly, each in turn getting the pool to
supply her with capital to buy the meagre stall of vegetables
which she takes to the market/ 3 While no one knows the
exact number of chits of various kinds, there is no doubt
that they run into thousands.

The chits are open to many malpractices. A number of
them fall in the category of a mere lottery with an appeal
to the gambling instincts. Sometimes promoters of chits
are unscrupulous and cheating and fraud naturally ensue. 4

1 Madras Banking Committee Report, para. 442.

2 For details see Ibid., para. 482.

3 Ibid., para. 483.

1 Ibid., paras. 487-91.

THE MONEY MARKET (A), 1926-82 71

3. CO-OPERATIVE CREDIT SOCIETIES.

Meaning of Co-operation. The essence of the co-operative
movement is the organisation of the members into one
fraternity by ties of common weal and interest, with a
view to promoting thrift and self-help among themselves and
to enable them to pool their credit and to minister to the
financial needs of one another. The members are their own
borrowers and lenders. Germany, France and Italy, until
the latter half of the nineteenth century, were face to face
with the same problems of rural credit which are oppressing
India today. The co-operative credit societies in those
countries not only freed the peasant from the clutches of
the moneylender, but organised rural credit on a sound
basis. That very movement was introduced in India in
1904, when the first co-operative credit societies Act was
passed.

Three Stages. The development of co-operation in India
may be said to fall in three main stages viz.: (i) 1904-12,
during which the movement was in its infancy and was
confined purely to credit; (2) T9I2-I9, 1 during which the
movement, in the first place, widened its scope for several
forms of non-credit activities although credit still continued
to occupy the position of the greatest importance, and, in the
second place, made various improvements like the opening
of provincial banks 2 as a result of the far-reaching recom-
mendations of the Maclagan Committee of 1915; and (3)
since 1919, in which year, consequent on the passing of the
Government of India Act, co-operation became a transferred
subject in the provinces under Indian Ministers who have
evinced keen interest in the development of the movement.
As conditions vary from province to province and each
province has its own Minister in charge of co-operation, a

1 The Indian Banking Committee splits this period into two i.e.,
1912-15 and 1915-19 (vide paras. 150-1 of the Committee's report).

2 The only province without a provincial bank is the United Provinces

72 THE MONETARY PROBLEMS OF INDIA

review of the working of the movement during the period
1926-31 is attempted below according to provinces separately.
But to assist the process of clarification, a brief description
of the existing co-operative machinery is given first.

Co-operative Machinery. The co-operative credit institu-
tions are of two types: (i) those which provide short-term
and intermediate credit, and (2) those which provide long-
term credit. The second type deserves special treatment
and is dealt with later in the chapter. Taking the first type,
there are three links in the chain viz., primary societies,
central banks and provincial banks.

The primary societies are associations of borrowers and
non-borrowers all residents of one locality mostly shaped
on the Raffeisen model with the principle of unlimited
liability which makes the members vigilant and serves to
protect the creditors. 1 Any resident of a village whom his
fellow-members regard desirable can become a member.
In the Punjab and the United Provinces and to a great
extent in Madras and Burma the members of primary
societies contribute a small share capital; in other provinces
share and non-share societies flourish side by side. The
societies are expected to raise local capital which may be
supplemented by small advances by the State, deposits
from non-members and loans from central and provincial
banks.

A Central Bank or a Banking Union 2 is the federation of
co-operative primary societies in a specified area and is

1 The loss in a co-operative society falls firstly on the member, secondly
on his sureties, thirdly on the reserve, fourthly on the share capital and
fifthly on the unlimited liability of the members, and finally on the creditors
of the society. (The Law and Principles of Co-operation, by H. Calvert,
Calcutta, 1926, p. 40.)

2 ' Historically speaking, the appellation " Central Bank" is used when
the central society admits as its members not only primary societies, but
also individuals. The phrase " Banking Union " is used when membership
is confined to societies only and individual members are excluded. In
practice the differentiation is gradually disappearing and individuals are
to be found as members in most co-operative banks everywhere.' (Indian
Banking Committee Report, 1931, para. 157.)

THE MONEY MARKET (A), 1926-82 73

usually located at an important town in a district. Central
banks have on their boards of management influential
business men besides representatives of primary societies,
and today they constitute an important factor in the Indian
money market. Their main function is to finance the
primary credit societies and act as balancing centres to them.
As a rule they do little commercial banking. Their resources
comprise their own capital and deposits of various kinds,
overdrafts, and short-term loans from the Imperial Bank of
India and joint-stock banks, and loans and advances from
the provincial bank and sometimes from other central
banks. According to the Banking Committee the capital
which the central banks can attract at present is ample
for the requirements of the movement, While the interest
they have to pay on the deposits is in some provinces as
low as 4 per cent. 1

A Provincial Bank is, again, a federation of central banks
in a province and its main function is to finance central
banks and act as a balancing centre to them. The re-
sources of a provincial bank are comprised in the same
manner as those of a central bank : it receives cash credits
and overdrafts from the Imperial Bank and loans from other
provincial banks.

The activities of the various provincial banks are co-
ordinated by the Indian Provincial Co-operative Banks
Association. ' In short, money flows from the provincial
to the central bank and from the central bank to the rural
societies, and from them to the individual borrowers/ 2

Rates of Interest. The rates of interest charged by the
primary societies from the cultivator are summarised in the
following table : 3

1 Indian Banking Committee Report, 1931, para. 157.

2 Ibid., para. 158.

3 Ibid., p. 129. Figures for Delhi and N.W.F. Province are not given
'n the Banking Report. They are taken from latest reports on working
of co-operative societies in those areas.

74 THE MONETARY PROBLEMS OF INDIA

Province.

Ajmer-Marwara - - - - 9 to 12

Assam - - - - - 15 or iSf 1

Bengal - - - - - - 74 to 15 S

Behar and Orissa - 12^ to 15$

Bombay ..... - 9l to I2|

Burma ------ jg

Central Provinces - 12

Delhi ------ I2

Madras - - - - - - 9! to io{(;

North-West Frontier Province - - 12^

Punjab - - - - - - 9 to 12!

United Provinces - 15

General Progress, 1926-32. Turning now to the general
progress of the co-operative movement, in 1925-26 there were
in India as a whole 80,182 societies with just over three
million members, and a working capital of R. 58 crores.
In 1930-31, the latest year for which figures are available,
the number of societies in existence in the whole of India,
including over 16,000 societies in the Indian States, was
106,166, with a membership of well over four millions and
a working capital of nearly R. 92 crores. 2 The record as
revealed by these statistics is one of continued progress.

Varying Progress in Different Provinces. But progress
varies in different provinces. This would be better under-
stood if one general consideration were borne in mind.
' If the reader glances at the map of India, he will see on the
east and in the centre an immense block of territory re-
presented by Bengal, Behar and Orissa, the Central Provinces
and the United Provinces, where, broadly speaking, the
agriculturist is a tenant holding his land by one form of
tenure or another from a landlord. This means that he can

1 Generally 12^ per cent, in the case of old societies in the Assam valley.

2 The figures relate to the financial year ending 3ist March, 1931, and
are taken from Statistical Statements Relating to Co-operative Movement in
India, during the year 1930-31, pp. 3, 4 and 5. The figures include both
credit and non-credit societies, but the latter numbered only about 16,000.
Even if separate figures for the former were given, the position would remain
materially unaltered.

THE MONEY MARKET (A), 1926-82 75

only offer personal security for any obligation contracted
by him. To the north, the west and the south of this block
are the ryotwari provinces of the Punjab, Bombay and Madras
that is, the provinces where the agriculturist as a rule has
mortgageable rights in his land and therefore can offer real,
instead of personal, security. Thus the co-operative move-
ment in the former group of provinces is faced with certain
difficulties which do not appear in the latter group.' 1

The Punjab. Taking the latter group first, during the
period 1926-31 (later figures not being available), the move-
ment has made on the whole good progress in the Punjab.
In 1926-27 the number of societies in the province was 16,563 ;
in the year ending on the 3ist July, 1931, it rose to 20,742.
During the same period there was a rise in the membership
from 505,122 to 721,037 and in the working capital from
R. 11,61 lakhs to 18,11 lakhs. 2 It must be pointed out that,
owing to the present conditions of economic depression, the
rate of increase in the number of societies has fallen during
the last two years. 3 But it will be noticed that membership
has increased faster than the number of societies and the
working capital faster than membership.

Equally gratifying is the expansion of the women and
children's co-operative movement, which is a special feature
of the Punjab. In 1926-27 there were 79 such societies,
with 1,163 members and R. 26,292 as working capital. In
1930-3* the number of societies had risen to 164, with a
membership of 2,871 and working capital of R. 1,39,701.*
Of the 164 societies 1:54 thrift societies are for women,
9 thrift societies for children both boys and girls of all ages
while one is a Better Living Society. 5

1 India in 1927-28, pp. 375-6. The position remains substantially the
same at the time of writing (1932).

2 Report on the Working of Co-operative Societies in the Punjab for year
ending 3ist July, 1927, p. 2; for year ending 3ist July, 1931, p. 3.

3 Ibid., year ending 3ist July, 1931, p. 4.

4 Ibid., year ending 3 1 st| July, 1928, p. 8; year ending 3ist July, 1931, p. 6.

5 Ibid., year ending 3ist July, 1931, p. 7.

76 THE MONETARY PROBLEMS OF INDIA

The work of consolidation of holdings another special
feature of the Punjab continues to make good progress.
In 1931 as many as 142 new societies were started for the
purpose, as compared with 113 in the preceding year. The
area consolidated was 50,105 and 72,821 acres in 1930 and
1931 respectively, while the average size of block increased
over the whole of the Punjab from 0-51 to 2-9 acres in 1930
and 0-61 to 3-3 acres in I93I. 1

As against the above progress, the percentage of repay-
ments to societies has decreased from 34 in 1926-27 to
16 in 1930-31 in a descending order of 33, 28 and 23 in the
three intervening years. 2

Bombay. In 1925-26 there were 4,656 societies in the
province, with 447,808 members and R.8,78,67,849 as
working capital. In 1930-31 the number of societies rose
to 5,896, with a membership of 585,869 and a working
capital of R. I3,9o,99,53o. 3

Urban societies which finance local trade and give modern
banking facilities of all kinds have made more progress
in Bombay than perhaps in any other province. On the
3ist March, 1931, there were in the Bombay Presidency
615 non-agricultural credit societies (including 82 urban
banks) with a membership of 208,357 and a working capital
of R. 3,79,57,222^ But in the case of factory workers,
the Bombay Provincial Banking Inquiry Committee point
out in their report (para. 223) that the workers ' are still
in the hands of sowcars and Marwari traders, and the only
service which the societies render to them lies in securing
funds for domestic expenses/

Madras. The movement in Madras has been the subject
of a special inquiry by a committee appointed in 1927 under

1 Report on the Working of Co-operative Societies in the Punjab for year
ending 3ist July, 1931, p. 28. 2 Ibid., p. 19.

3 Report on the Working of Co-operative Societies in Bombay, 1925-26,
P- 5; I93<>3i PP- 8-9.

4 Ibid., 1930-31, p. 44.

THE MONEY MARKET (A), 1926-32 77

the presidency of Mr. Townsend. 1 The report of the
Townsend Committee was published on the 2ist February,
I928. 2 On the 3oth June, 1927, the Madras Presidency had
12,969 societies, with 830,522 members and R. 13,34*34
lakhs of working capital. On the 3oth June, 1931, there
were 15,042 societies, with 981,100 members and R. 18,00-52
lakhs of working capital. Acting upon the advice of the
Townsend Committee, a policy of rectification and consolida-
tion is being steadily pursued with beneficial results. 3

The trading societies and societies for organising labour
on a co-operative basis, which are a special feature of the
movement in Madras, appear to be making fair progress.

But a disquieting feature has been the increase in criminal
prosecutions for misappropriation of funds to 86 in 1930-31,
as against 50 in 1929-30 and 43 in 1928-29. Of the 86
prosecutions, 68 were disposed of by the courts by the end
of the year, and there were 54 convictions. 4

United Provinces. The United Provinces, quite close to
the Punjab, have a different story to relate. There the
Government appointed a committee in September 1925 ' to
inquire and report upon the reasons why co-operative
societies in various localities have not succeeded better in
gaining the confidence and support of the people/ The
committee, after a careful survey of the whole field, came
to the conclusion that, judged by proper standards, ' most
of the primary societies of the provinces are a sham/ In
its resolution on the Oakden Committee's report, the Govern-
ment of the United Provinces stated : ' This may appear to be
a harsh judgment, but the Government on a careful con-
sideration of the facts adduced by the Committee agree that

1 Report on the Working of the Co-operative Societies Act, Madras, 1926-27,
p. 48.

2 Ibid., 1927-28, p. 28.

3 Government Order No. 374, Government of Madras, dated i2th March,
1932.

4 Report on the Working of the Co-operative Societies Act, Madras, for
1930-31. P- i?-

78 THE MONETARY PROBLEMS OF INDIA

it is substantially correct/ 1 The reports on the working of
the societies for 1926-27 onwards are a record of continuous
efforts at reconstruction and reorganisation and honest
admission of partial failure.

According to the Provincial Banking Inquiry Committee,
some progress has doubtless been made in effecting im-
provement in existing societies, * but the results hitherto
achieved are not great, and co-operation is not yet a living
force in the province, save perhaps in a few isolated
places/ 2

What is a matter of special anxiety to the co-operators
in the province is the increase in overdues from 31 per cent,
in 1927-28 to 38 per cent, in 1928-29, 47 per cent, in 1929-30,
an d 53 per cent, in I93O-3I. 3

Central Provinces. As in the United Provinces, the period
1926-31 has been one of consolidation and reconstruction
for co-operative societies in the Central Provinces also. An
idea of what has happened may be obtained from the fact
that 232 weak societies were weeded out in 1925-26, 325 in
1926-27, 295 in 1927-28, 269 in 1928-29, and 161 in 1929-30,
making a total of 1,282 societies dissolved in five years. An
interesting feature of recent years, however, is the con-
solidation of holdings. A special officer has been deputed
to carry on the consolidation work, and in 1928 the pro-
vincial Legislative Council passed the Consolidation of
Holdings Act to be applied to one division only.

Burma. The position in Burma has been far from satis-
factory. It was thoroughly investigated by a Committee
under Mr. Calvert. The Committee was of opinion that the
system required a thorough reorganisation. The Registrar
and his staff have been so busy in the process of re-

1 Extract from the Resolution of the Government of United Provinces
on the Report of the Oakden Co-operative Committee, September, 1926.

z United Provinces Provincial Banking Inquiry Committee Report, 1929-30,
para. 288.

3 Report on the Working of Co-operative Societies in the United Provinces
for 1929-3. P- *; f o r I93Q-3 1 . P- 3-

THE MONEY MARKET (A), 1926-82 79

organisation that little or no constructive work is in
progress. 1

North- West Frontier Province, In the North- West Frontier
Province no agricultural banks or co-operative credit societies
existed at all until as late as 1925. After the passing of
the Co-operative Credit Societies Act of 1904, an attempt
was made to start them. The only society Which worked
there for any length of time ceased to exist in 1913-14. The
rural population of the province is orthodox Mahomedan
and is opposed to the levy of interest or profit on capital.
But economic pressure at long last proved stronger than a
religious injunction, and the ice was broken under the able
leadership of the Registrar, Mr. C. F. Strickland. The move-
ment was reintroduced into the province in May 1925, and
during the year ending 3ist July, 1:931, there were 239
agricultural credit societies, 3 non-agricultural credit and
14 non-agricultural non-credit societies with 5,923, 750 and
1,049 members and R. 5-39, R. 1-80 and R. 0-79 lakhs capital
respectively. 2

Behar and Orissa. As a result of the recommendations of
the Royal Commission on Agriculture in India and of the
recent Behar and Orissa Provincial Banking Inquiry Com-
mittee Report, a Committee was appointed on the 28th
August, 1931, ' to review the present condition of co-opera-
tive institutions in Behar and Orissa and to make recom-
mendations for the improvement of co-operation in the
province.' The report of the Behar and Orissa Committee
on Co-operation, 1931-32, has been issued recently (May 1932)
and is highly informative and suggestive.

Bengal, Assam, Ajmer-Marwara, Delhi and Coorg. The
annual reports on the working of co-operative societies for
the last five years show that the expansion of co-operative

1 Burma Banking Committee Report, 1929-30, para. 391.

2 Report on the Working of the Co-operative Societies in the North-West
Frontier Province, up to 3ist July, 1931, p. 2.

8o THE MONETARY PROBLEMS OF INDIA

credit in Bengal, Assam, Ajmer-Marwara, Delhi and Coorg
has been very steady, though not spectacular. But the
recent economic depression 'imposed on the movement a
much severer strain than it has ever had to face and threw
into prominence its defects and weaknesses/ 1 For the most
part the great need of the moment has been consolidation
rather than further expansion of the movement. 2

Recent Depression and Co-operation. The adverse effect
of the recent trade depression has not been confined to any
particular province or provinces, it has covered the whole
country. The following observations of the Registrar of
Co-operative Societies, Bombay, may be taken to describe
the situation throughout the whole of India.

'The general situation is distinctly disquieting. The trade
depression, the fall in commodity prices, and the political un-
certainty have disorganised the whole country side. The
economic distress has demoralised the agriculturist, and arrears
and overdues have increased enormously. Moreover, with the
economic and political horizons still clouded, there is no knowing
when an agrarian crisis may again arise. . . . The way in which
the storm has been weathered so far indicates the inherent
soundness of the Movement, and gives good ground for hope
that its beneficent activities and its financial stability will be
maintained in the future as well/ 3

Inadequacy of the Movement. But it is a matter of regret
that the movement is yet so inadequate as it is. According
to the reports of the various Commissioners of Income-tax,
with the exception of the Punjab, co-operation has not
apparently affected the rural moneylending business, the
village moneylenders being still the principal source of
finance for the rural population. 4 In this connexion some

1 Report on the Working of Co-operative Societies in Bengal, 1930-31, p. 8.

2 Ibid., p. 9.

3 Report on the Working of Co-operative Societies in Bombay for year
ending 315! March, 1931, p. 67.

4 All India Income-Tax Report and Returns for the year 1930-31, p. 7.

THE MONEY MARKET (A), 1926-82 81

of the statistics made available by the Royal Commission
on Agriculture in India and the recent Banking Inquiry
Committee are valuable. That the movement affects only
a small part of the population must be obvious from the
following table : l

Proportion of Members of Agri-
cultural Societies to Families in
Rural Areas.

All Societies Credit Societies
(per Cent.). (per Cent.).

Ajmer Marwara - - - 15*4 15-0

Assam - 2-9 2-9

Bengal ----- 4.4 3-8

Behar and Orissa - 3-2 3*1

Bombay - 10-0 8-7

Burma ----- 3.9 3-7

Central Provinces and Berar - 2-4 2-3

Coorg ----- 36-2 36-2

Delhi ----- 11.5 11-5

Madras ----- 8-3 7-9

North-West Frontier Province - 0-2 0*2

Punjab ----- 10-9 10-2

United Provinces - 1*8 1*8

Even in a small area like Coorg, where the movement is
at its best, it touches well below 40 per cent, of the rural
families, while in the North- West Frontier Province not
even one out of a hundred families are benefited. Among
the major provinces the Punjab and Bombay stand highest,
with a record of n and 10 per cent, of families respectively.

Nor is the extent of finance provided any more satis-
factory, even in Bombay and the Punjab, which are ad-
mittedly the most advanced provinces as regards co-opera-
tion. In Bombay the co-operative societies, according to
the Provincial Banking Inquiry Committee, provide but
7 per cent, of the total finance required by the agriculturists. 2
The Punjab Banking Committee estimate the agricultural
financial needs of the province at between 52 and 65 crores

1 Report of the Royal Commission on Agriculture in India, 1928, p. 447.

2 Bombay Banking Inquiry Committee Report, para. 227.

6

82 THE MONETARY PROBLEMS OF INDIA

of rupees, and find that the co-operative societies provide
' only a small fraction of it.' 1

Causes of Slow Progress. The question naturally arises as
to why the movement has not made more progress in India.
The answer may be given in the words of Mr. Kharegat
with regard to the United Provinces. ' To some extent the
better class of cultivator is frightened by the bogey of joint
responsibility. The chief reasons, however, are that accounts
have not always been correctly maintained ; that the members
have had to put up with a great deal of personal incon-
venience and even indignity; that they cannot get sufficient
money for their requirements ; that they have often to wait
a long time for it; and that they are not educated to the
necessity and importance of punctuality in repayments and
prefer the more accommodating policy of the moneylender,
forgetting its ultimate consequences. At the present time,
in a great many cases, the moneylender and the co-operative
society flourish side by side, the cultivator using both to
suit his convenience. He obtains part of his finance from
the society and the rest from the moneylender/ 2 According
to the United Provinces Banking Inquiry Committee, ' the
existing defects and difficulties appear to be inherent in the
system of work. The essence of a co-operative society is
that the members should learn to manage their own affairs;
with an illiterate peasantry the task of teaching them to
do so is a slow and laborious process. . . . The extreme
importance of education and supervision has so far not been
realised, whilst the desire to see quick and widespread
results has actually retarded progress/ 3

Land Mortgage Banks. But one of the most serious
problems with which the co-operative societies will have to
deal for some time to come is that of the existing accumu-

1 Punjab Banking Inquiry Committee Report, para. 150.

2 United Provinces Banking Committee, 1929-30, Minutes of Evidence,
vol. iii., p. 414.

3 United Provinces Banking Committee Report, para. 289.

THE MONEY MARKET (A), 1926-32 83

lated debts due to high and compound interest, or to un-
economic methods and habits and to dishonest dealings.
Redemption of old debts raises the problem of providing
long-term credit for which the co-operative machinery
includes a special type of institutions called land mortgage
banks. They will be discussed at length in Chapter VI.,
but with a view to completing the picture of co-operation
as a whole, a brief review of their progress in the various
provinces during the period 1926-31 is attempted below.

No land mortgage banks exist in Behar and Orissa, Burma,
the United Provinces and the centrally administered areas.
In Burma a Land Mortgage Bill has proved abortive, but
it is proposed to make an experiment with two independent
banks on a very small scale, their liabilities not exceeding
R. 2\ lakhs. A lakh of working capital has been provided
by the provincial government, and further progress depends
on the results of the present experiment. 1

In the Punjab there have been since 1927-28 twelve
mortgage banks, four of the old type (unlimited liability)
and eight of the new. The new banks are based on the
principle of limited liability and work in a comparatively
small area. They also require the borrower to furnish a
partial guarantee (up to R. 1,000) of his loan from a credit
society, if such a society exists in his place of residence.
During 1930-31 the banks had a working capital of R. 22*78
lakhs, of Which R. 14*57 lakhs were contributed by Govern-
ment at 6| per cent. 2 As compared with the preceding
years the year 1930-31 is remarkable for the decline in both
the number and amount of loans advanced. This is part
of the present policy owing to the extremely low yield from
agriculture. The position is explained by Government in
the following words: 'Land Mortgage Banks probably

1 Indian Banking Committee Report, 1931, para. 204.
a Report on the Working of the Co-operative Societies in the Punjab for
the year ending 3ist July, 1931, p. 32.

84 THE MONETARY PROBLEMS OF INDIA

the most difficult of all forms of co-operative effort show a
small profit; but they have been badly hit by the collapse
of prices of agricultural produce; it has been found necessary
to relieve the borrowing members of part of their burden by
reducing the instalments : new loans are being restricted and
old loans are being recovered with difficulty. It takes many
years to build up a sound mortgage bank, and the present
crisis has fallen upon them before they had time to collect
large reserves. As the value of land has also fallen, realis-
ation by sale of the security is not at present a suitable
measure, and much care and patience will be required to
nurse these institutions through their present troubles/ 3

The Madras Presidency has adopted a bold policy of
establishing land mortgage banks on the limited liability
basis. The operations of each bank are restricted to a
compact group of villages, and the borrowing power is
ordinarily limited to eight to ten times the paid-up share
capital. Recently, however, the tendency has been to extend
the local area of operations and to increase the individual
maximum borrowing power. 2

A central land mortgage bank has been recently established
on the recommendation of the Townsend Committee. Be-
sides, at the end of 1930-31, there were 37 primary land
mortgage banks of which 13 did no work beyond collection
of share capital. The total number of members was 5,128,
with a paid-up share capital of R. 1,99,899, while the working
capital amounted to R. 17,10,669. Of the 37 banks, 15
worked at a profit of R. 18,372 and 22 incurred a loss of
R. n,oo9. 3

In the Bombay Presidency no land mortgage banks
existed before 1926-27, while there were only three working
during 1930-31. The Registrar of Co-operative Societies

1 Extract from the Proceedings of the Punjab Government (Ministry of
Agriculture), No. 322-D, dated the 29th January, J93 2 -
- Indian Banking Committee Report, 1931, para. 207.
3 Report on Co-operative Societies, Madras, 1 930-3 1, p. 25.

THE MONEY MARKET (A), 1926-82 85

as well as the Bombay Provincial Bank are represented on
the managing committee of the mortgage banks and may
accept or reject its recommendations in regard to loans.

In Bengal there are two land mortgage banks. The first
was established in 1924, but did not start work till 1925.
The other was started in 1927, but for want of finance could
not do much business til] February 1929. Both are limited
liability institutions.

A beginning Was made in Assam by establishing a land
mortgage bank in the district of Kamrup in 1926. A second
bank Was opened in Sylhat in March 1927, and in 1930-31
the number of banks had increased to five. In the case of
Kamrup and Sylhat banks, no loans can be given exceeding
twenty times the paid-up share money of the borrower, or
50 per cent, of the market value of the land. The maximum
period of repayment is twenty years, and an individual's
loan must not exceed R. 10,000. Both the banks work on
deposits and do not issue debentures. Their overdues of
both principal and interest are reported to be heavy. 1

In the Central Provinces the question of opening land
mortgage banks was seriously examined by the Registrar of
Co-operative Societies during 1926-27. In 1929-30 Govern-
ment sanctioned the establishment of two land mortgage
banks at Morsi and Mehkar as an experimental measure.
It is yet early to speak about the result of the experiment.

4. STATE LOANS.

Loan Acts. The Government afford financial assistance
to agriculturists under two Acts called the Land Improvement
Loans Act XIX. of 1883 and Agricultural Loans Act XII. of
1884. Complete statistics of such loans made in the various
provinces are not available, but the statistics below, which
have been furnished by the Provincial Banking Inquiry

Banking Committee Report, 1931, para. 210.

86 THE MONETARY PROBLEMS OF INDIA

Committees, indicate that the amount of State finance
granted is very small in proportion to the needs of agricul-
ture. 1

(In thousands of Rupees.)

Amount of Loans Under

the-

Name of Province.

Land Inv Agricultural

Remarks.

provement

Loans

Loans Act.

Act.

Assam

7

1,50

Average of five years.

Bengal

93

*4,44

In 1928-29.

Behar and Orissa 1 70

8,34

Average of five years.

Bombay -

13,72(0)

9,57(*)

(a) In 1926; (b) aver-

age of normal

years.

Burma

20 (a)

i,9o(5)

(a) Ordinary year;

(b) average of

ten years.

Centra,! Areas -

1,70

i,58

Average of three years.

Madras

12,70

ii,54

In 1927-28.

The Punjab

5>o

11,00

Average of five years.

Rates of Interest. Ever since the passing of the Loans
Acts, the usual rate of interest on the State loans, called
Taccavi, has been 6 to 6| per cent., with a minimum of 3 per
cent, and a maximum of 12 per cent. 2

As regards the period of repayment, the maximum per-
missible under the Land Improvement Loans Act is thirty-five
years, although in practice it is restricted to twenty years or
even less, 3 while loans under the Agricultural Loans Act have
to be repaid generally much sooner than those under the
Land Improvement Loans Act.

Defects. Apart from the question of amount, the system
of State loans is open to two serious objections. Firstly,

1 Indian Banking Committee Report, 1931, p. 180.

2 At present the maximum is 10 per cent, in Burma alone. In Coorg
the rate is 7$ per cent. (Indian Banking Committee Report, 1931, para. 238.)

s In Central Provinces it is only five or six years. (Ibid.)

THE MONEY MARKET (A), 1926-32 87

from the standpoint of administration it is inelastic and
difficult to supervise. No executive authority in a district,
however able, can satisfactorily discharge the duties which
properly belong to specialised credit institutions of financing
the agricultural improvements of the area under its juris-
diction. Complaints are often heard of delay in the disposal
of loan applications, the levy of illegal gratifications by the
petty officials through whom advances and recoveries are
made, and rigidity and unfairness in the process of realis-
ations. 1 Secondly, the system of State aid to a cultivator
comes as a windfall and discourages thrift and self-help,
without which no permanent improvement is possible.

Agency of Distribution. To overcome the latter objection
suggestion is sometimes made that takavi loans would be
best administered through co-operative agencies. 2 This is
actually the case in Bombay, where takavi loans can be
distributed only through co-operative societies in places
where they exist. But the Madras, Assam, Behar and Orissa
and the Punjab Provincial Banking Committees are against
this practice, and they have the support of the Indian Central
Banking Committee, which points out the inadvisability of
using the co-operative agency to advance loans to non-
members on the responsibility of the society for their
recovery and proper application. There is no objection,
however, to Government employing the co-operative societies
as mere agents for distribution. 3

1 Indian Banking Committee Report, 1931, para. 240.

- Indigenous Banking in India, 1929, p. 189.

3 Indian Banking Committee Report, 1931, para. 245.

THE MONEY MARKET (B), 1926-82

i. JOINT-STOCK BANKS.

Origin and Development, 1860-1913. Modern joint-stock
banking in India may be said to date definitely from 1860,
for it was by Act VIII. of that year that the principle of
limited liability was first applied to the joint-stock banks. 1
But they hardly made any progress until 1905, first because
of the speculative crisis of 1865 in Bombay and, secondly,
because of the currency chaos between 1873 and 1893. The
former by bringing to the Bank of Bombay the disgrace of
liquidation proceedings 2 in 1868, and the latter by causing
trade uncertainties, created an atmosphere which was
inimical to the promotion of new banking ventures. The
Swadeshi movement of 1906-13 led to the establishment of a
large number of new joint-stock banks, as appears from the
table on page 8g. 3

The number of banks with a capital and reserve of over
5 lakhs was thus nearly doubled during 1906-13, but the
number of smaller banks which sprang up was very much
larger. Of the 98 banks which failed during ig^-ig, 4 as
many as 58 were created during the boom of 1906-13. 5 But

1 In England the principle of limited liability was extended to banking
institutions in 1858, although liability for note issue still continued un-
limited.

2 From these, however, the Bank came out unscathed and it was re-
started the same year.

3 Statistical Tables Relating to Banks in India, ist issue, 1915, p. 15.

4 The banks which have failed since 1919 were mostly established
after 1913-

5 These figures are arrived at by an analysis of the information given
in the annual Statistical Tables Relating to Banks in India,

88

THE MONEY MARKET (B), 1926-82

89

JOINT-STOCK BANKS WITH CAPITAL AND RESERVE OVER
R. 5 LAKHS (1906-13).

Year.

No. of
Banks.

Capital and
Reserve
(R. Lakhs).

Deposits
(R. Lakhs).

Cash
Balances
(R. Lakhs).

Ratio of
V. to IV.

I.

II.

III.

IV.

V.

1906

IO

1,90

ii,55

i,49

13

1907

II 1

2,92

14,00

i,94

14

1908

14

3,09

16,26

2,45

15

1909

15

3,54

20,49

2,79

*4

1910

16

3,76

25,66

2,80

II

igil

18

4,12

25,29

3,62

*4

1912

18

4,26

27,26

4,00

15

1913

18

3,64

22,59

4,oo

18

most of the existing important joint-stock banks were also
established during these years. Amongst them may be
mentioned the Bank of India (1906), the Indian Bank (1907),
the Punjab and Sind Bank (1908), the Co-operative Hindu-
stan Bank (1908), the Bombay Merchants' Bank (1909), the
Central Bank of India (IQII), and the Bank of Mysore

Apart from the rapid growth in the number of joint-stock
banks, another fact which emerges with equal clarity from
the foregoing table is the unsteady and low proportion of
the banks' cash to their liabilities on deposits. The year
1913 showed some improvement in this respect, when the
ratio had risen to 18 per cent., but it is noticeable that this
rise in the proportion of cash to liabilities on deposits was
accompanied by a reduction in the deposits. Moreover,
even 18 per cent, was not a high ratio in the peculiar con-
ditions of India, and on the whole the banks' cash position
during 1906-13 was anything but satisfactory.

1 The figure given in the Statistical Tadles, and also in Indian Finance
and Banking, by G. F. Shirras, 1920, p. 470, is 20, but this seems an obvious
misprint. The Correct figure is n. (Indian Currency and Finance, by J. M.
Keynes, 1913, p. 224.)

90 THE MONETARY PROBLEMS OF INDIA

The Bank Failures of 1913-17. The period of boom was
followed by the crash of 1913-17, in which the total paid-up
capital of the banks that failed was no less than 51 per cent. 1
of the total paid-up capital of all the joint-stock banks
surviving in 1917. An idea of what happened may be
gathered from the following table : 2

LIQUIDATIONS.

Capital (in Lakhs of Rupees).
Year. Number. Authorised. Paid up,

1913 - - 12 2,74 35

1914 42 7,10 1,09

1915 ii 56 5

1916 - - 13 2,31 4

1917 9 76 25

Total - 87 13,47 T >78

Thus, within five years, as many as 87 banks with a paid-up
capital of R. 1,78 lakhs went into liquidation in a country
in which there were, and still are, very few joint-stock banks.
It is true that most of the institutions which disappeared
were small and weak, but with them disappeared the following
comparatively big banks as well:

Paid-up Capital (in
Lakhs of Rupees).

1. The Indian Specie Bank 75

2. The People's Bank 13

3. The Credit Bank of India 10

4. The Standard Bank of Bombay 10

5. The Bank of Upper India 10

Total - 1,18

Position after the Crisis, 1913-17 to 1925. In estimating
the progress of joint-stock banking since the crisis of 1913-17,
the following statistics will be found useful :

1 Statistical Tables Relating to Banks in India for 1917, p. 2.
- Shirras, op. cit. t p. 366.

THE MONEY MARKET (B), 1926-82 91

CAPITAL, RESERVE, DEPOSITS AND CASH BALANCES OF THE PRINCIPAL INDIAN
JOINT-STOCK BANKS ON 3isT DECEMBER EACH YEAR, 1 1913-25.

CLASS B.

CLASS A.
(Capital and Reserve over R. 5 lakhs.)

(Capital and Reserve, R. 1-5
lakhs.)

Year.

No. of
Banks.

Capital
and
Reserve.

Deposits.

Cash
Balances

No. of
Banks.

Capital
and
Reserve.

Deposits

Cash
Balances.

-

R. lakhs.

R. lakhs.

R. lakhs.

R. lakhs.

R. lakhs.

R. lakhs.

1913 (pre-

18

3.64

22,59

4>o

23

50

1,51

25

War year)

1914

17

3>93

i7,n

3.53

25

55

1,26

28

1915

2O

4>38

17,87

3,99

25

55

91

20

1916

2O

4,61

24.71

6,03

28

63

1,01

17

1917

18

4.67 3M7

7,65

25

54

99

20

1918

19

6,02 40,59

9,49

28

63

1,55

37

1919

18

7.^3 58,99

12,17

29

75

2,28

54

1920

25

10,92

7LI5

16,31

33

82

2,33

42

1921

27

12,40

76,90

15,66

38

,00

3,26

44

1922

27

10,64

61,64

12,04.

41

,11

3,38

56

1923

26

9,73

44.43

7,37

43

,11

3,26

61

1924 29

10,71

52,50

11,30

40

,07

2,67

34

1925 28

10,60

54,49

IO,IO

46

,18

342

68

Unsteady Increase in Resources. The first fact which
emerges from a study of the foregoing table is the unsteady
increase in the total resources of the joint-stock banks
during the period 1913-25. This will be evident from the
following summary of the statistics :

(In Crores of Rupees.)

1913.

I9H.JI9'*

1916.

1917. 1918.

1919.

1920.

19,,.

1922.

1923.

1

1924. | 1925.

i

Capital and 4

4

5 5

5 : 7 8

12

13

12

ii

12 | 12

Reserve

Deposits

24

18

19 26 i 32 : 42

61

73

80

65

4 8

55 ! 58

Total

28

22 24

3i

37 i 49

69

85

93

77

59

67 ! 70

All the three sets of figures i.e., Capital or Reserve,
Deposits and Total Resources follow throughout the same
general trend. It is, perhaps, most important to follow the
statistics of deposits, the movement of which shows the vary-

1 Statistical Tables Relating to Banks in India in 1926, p. 2.

92 THE MONETARY PROBLEMS OF INDIA

ing position of the banks in the money market and the confi-
dence they enjoy in it. Starting with 1913, we find a fall of
R. 6 crores in the deposits in the very next year, which may
be accounted for by the banking crisis caused by the out-
break of the War. From 1915 onwards the deposits are seen
mounting up with increasing rapidity, until in 1921 the record
figure of R. So crores is reached. Then follows a striking
fall, culminating in 1923, when the deposits declined to
R. 48 crores. It may be argued that these were exceptional
years of inflation followed by deflation, in which there were
marked movements in the general price-level. In order to
allow for this phenomenon, let us convert the statistics of
deposits for the various years in terms of the pre-War price-
level. The result is as under :

1913. ^1914

1015.

1916.

1917.

1918.

1919.

1920.

1921.

1972. [ 1923.

1924

1925.

General index
of price-level 1

100 103

106

129

137

157

1 66

183

173

164 1 154

1

158

159

Deposits
(nominal)

24 18

19

26

32

42

6l

73

80

65! 48

i

55

58

Deposits con-
verted to pre-
War value

24 17

i

18

20

23

27

36

40

46

40 31

35

36

(N.B. The Deposits are in crores of rupees.)

The position of joint-stock banking during 1913-25,
judging from the variations in the amount of deposits, even
after taking into account price movements, was not free
from anxiety. This becomes clear if the figures are re-
produced in diagrammatic form.

In the diagram on page 93 it will be seen that the two curves
representing deposits follow the same trend, but that the
rises and falls in the case of the curve that makes allowance
for variations in the general price-level are less pronounced
than in the case of the curve representing the nominal value.

1 Computed from General Index Number based on thirty-nine commodi-
ties, basic year 1873, published by the Director-General of Commercial
Intelligence and Statistics, Calcutta.

THE MONEY MARKET (B), 1926-32 93

If we look at the former, two facts at once stand out: a
continuous rise in deposits, with an accelerated pace towards
the maximum in 1921, and a sharp fall in 1923. The rise
may be accounted for by the extraordinary activity in trade
and the flotation of new companies in the post-War boom.
The world-wide trade depression which followed the brief
boom, and in which India had her share, coupled with the

DEPOSITS OF THE JOINT-STOCK BANKS, 1913-25.
100

1913 14

'19 '20
Years

collapse of the Indian exchange in 1920-21, explains the fall
in the deposits in 1923. In the following two years they show
signs of slow recovery. Of course, the economic conditions
in India in 1921 and 1923 were exceptional, but the fall of
R. 15 crores (R. 22 crores, if no allowance is made for changes
in prices) in deposits within two years was a clear indication
of the weakness of the Indian banking system in face of
unfavourable conditions.

94 THE MONETARY PROBLEMS OF INDIA

The Bank Failures during 1918-25. The review of joint-
stock banking in India before 1925 may be completed by
examining the bank failures since the critical years of 1913-17.
That the failures of banks during 1918-25 do not compare
with the seriousness of those of 1913-17 is clear from the
following statement, but the fact that they numbered 91 in
eight years, and involved a paid-up capital of R. 5*13 crores
is serious enough.

STATEMENT SHOWING FAILURES OF INDIAN JOINT-STOCK
BANKS FROM 1918-25.

No. of

Capital.

Year.

Companies

Involved.

Authorised.

Subscribed.

Paid-up.

1918

7

2,09,49,970

4.85,651

1,46,185

1919 -

4

52,50,000

6,47,185

4,02,737

1920

3

IO,40,OOO

7,67,700

7,24,717

1921

7 ! 70,40,000

5,80,965

1,25,329

1922

15

10,15,55,

27,25,744

3,29,99!

1923

20

21,86,89,995

9,92,36,480

4,65,47,325

1924 - - 18 ! 6,30,30,000

26,46,370

11,33,623

1925 - - 1 17 1 1,89,80,000

2541,695

18,75,795

Position during 1926-32. Having briefly surveyed the
progress of Indian joint-stock banking prior to 1925, the
position during the last seven years may now be examined.
It is unfortunate that statistical information about banks in
India is at the time of its publication usually two years out of
date. 1 According to the latest statistics available at the
time of writing, it appears that in 1930 there were 84 joint-
stock banks from which returns were received by the Govern-
ment of India. Of these, 30 had a paid-up capital and
reserve of R. 5 lakhs and over, and 54 were smaller banks

1 The Statistical Tables Relating to Banks in India, published in 1932,
contain returns up to 1930 only.

THE MONEY MARKET (B), 1926-32 95

with a paid-up capital and reserve of from i lakh to
5 lakhs. The following table gives a general idea of the
progress during 1926-30:

CAPITAL, RESERVE, DEPOSITS AND CASH BALANCES OF THE PRINCIPAL
INDIAN JOINT-STOCK BANKS ON SIST DECEMBER EACH YEAR,
I926-30. 1

CLASS A.

CLASS B.

No. of

Capital

Cash

No. of

Capital

Cash

Year.

Banks.

and

Deposits.

Balances.

1 Banks.

and

Deposits.

Balances.

Reserve.

Reserve

R. lakhs

R. lakhs.

R. lakhs.

R. lakhs.

R. lakhs.

R. lakhs.

1926

28

10,84

59,68

9.12

47

1,26

3.47

82

1927

29

11,08

60,84

7,7

48

1,22

3.46

52

1928

28

11,10

62,85

8,19

46

1,20

3,50

52

1929

33

n.54

62,72

9,05

45

1,15

3,58

45

*930

3

11,85

63,22

7^>7

54

1.37

4.3i

? 2

Numbers and Resources. The first fact which meets the
eye in the foregoing table is the difference in the numerical
strength of various banks. The number of joint-stock
banks with a capital of over 5 lakhs rose from 28 in 1926
to 29 in 1927, fell to 28 in 1928, rose to 33 in 1929, and
again fell to 30 in 1930. On the other hand, the number of
smaller banks with a capital of over i lakh but under 5 lakhs
rose from 47 in 1926 to 48 in 1927, and though it fell to 46
in 1928 and to 45 in 1929, it rose to 54 in 1930. Taking
both classes of banks together, they rose from 75 in 1926 to

77 in 1927, and although they fell to 74 in 1928, they rose to

78 in 1929 and to 84 in 1930.

Turning to the resources of the banks, there is, on the one
hand, a continuous rise in the capital and reserves of the
bigger banks and, on the other hand, a continuous fall in
the capital and reserves of the smaller banks until 1929, but
a record rise in 1930. The latter phenomenon is explicable
by the changes in the number of the banks themselves, but
the fall in the capital and reserve of these banks from

1 Statistical Tables Relating to Banks in India in 1930, p. 2

96 THE MONETARY PROBLEMS OF INDIA

R. 126 lakhs to R. 122 lakhs, while their number increased
from 47 to 48 in 1927, is unexpected. As for the deposits,
on the whole, they show a tendency to rise. The fall in the
deposits of the bigger banks from R. 62-85 lakhs to R. 6272
lakhs at a time when their number rose from 28 to 33 may
well be occasion for some anxiety, but it is relieved by the
rise in the deposits from R. 6272 to R. 63-22 lakhs in 1930,
even although the number of banks fell from 33 to 30. If the
above statistics of both classes of banks are combined to-
gether a slight but continuous improvement is visible.

(In Crores of Rupees.)

Year.

Capital and
I Reserve.

Deposits. | Total Resources.

I

1926 -
1927 -
1928 -
1929 -
1930 -

- ! I2-I

- j 12-3
12-3

13-2

63-1

66-3
66-3

76-6
78-6
79-0
807

The above figures need correction, however, in order to
allow for variations in the general price-level. Taking the
statistics of deposits, 1 they are adjusted below in terms of
the pre-War price-level :

Year.

1926.

1927.

1928.

1929.

1930.

General index of price-level,

1913 - 100 -

151

141 i 141

142 120

Deposits (nominal)

6 3 -i

64-3 66-3

66-3 67-5

Deposits converted to pre-

1

War value -

42

46

47

467

56

(N.B. The Deposits are in crores of rupees.)

1 These alone are taken to facilitate comparison with similar statistics
on page 92 above.

THE MONEY MARKET (B), 1926-82 97

The deposits, after taking into account the price move-
ments, undoubtedly show marked improvement in the year
1930 as compared with 1926. But, if the last year is
excluded, a slight decline is revealed in 1929, and the im-
provement in the preceding year is so small that a cautious
critic might be inclined to consider it as an approximation
to stagnation rather than an indication of progress. Put

DEPOSITS OF THE JOINT-STOCK BANKS, 1926-30.
80

I

-(RSai;

1926 '27 '28 '29

Years

'30

in diagrammatic form, the statistics serve to show on the
whole clear progress in the resources of joint-stock banks
in recent years.

Summary of Balance Sheets. It will be perhaps better to
examine and summarise the balance sheets of some of the
leading joint-stock banks. The following table indicates the
position of the better-known existing banks as shown in the
latest available balance sheets: 1

Indian year Book, 1932, p. 671.

98 THE MONETARY PROBLEMS OF INDIA
(In Lakhs of Rupees.)

1
I aid-up
1 Capital.

i
Reserve. Deposits.

Cash and
Invest-
ment.

Allahabad Bank, Ltd., affili-

1

ated to P. and O. Banking

i

Corporation -

35

44 11,02

6,81

Bank of Baroda, Ltd. -

30

24 5,95

3,66

Bank of India, Ltd.

IOO

92 i3,n

7,67

Bank of Mysore, Ltd. -

20

l6 2,22

99

Central Bank of India, Ltd. -

168

86 14,81 10,40

Indian Bank, Ltd. (Madras) -

12

13 i 1,86 38

Punjab National Bank, Ltd. -

3*

21 | 5,09

2,32

Union Bank of India, Ltd. -

39

7 27 46

Of the eight banks, the Union Bank of India, Ltd., appears
to be the least satisfactory with only R. 7 lakhs of reserve
as against a capital of R. 39 lakhs. The deposits are R. 27
lakhs, while cash and investments aggregate R. 46 lakhs.
Of the rest, the reserve position of most of the banks is fair,
but not quite as sound as those of the English banks.

Dividends. Nor do the Indian joint-stock banks appear
to be earning increasing or even steady profits. The follow-
ing figures of dividends declared by the leading banks speak
for themselves :

Dividends

per

Cent, per Year.

Paid-up

Capital.

i i

1927. 1928.

1929

.1930-

I93 1 -

1932.

R.

Allahabad Bank - 35,50,000

18

18

18

. 18 ; 18

18

Bank of Baroda - 30,00,000

14

12

IO

10 10

10

Bank of Mysore - : 20,00,000

12

14

14

14 12

6

Bank of India - - 1,00,00,000

10

10

10

IO IO

ii

Central Bank of India 1,68,00,000

<J

6

6

6 6

6

Indian Bank - - 12,79,280

I0i 12

12

12

12

4i*

Punjab National Bank 31,26,075

i2j 8

8

6

Nil

Nil*

* First half-year.

THE MONEY MARKET (B), 1926-32 99

With the exception of the Bank of India no bank shows
an improvement in the dividends, while several show a
deterioration, which in the case of the biggest bank is
considerable.

Proportion of Cash to Liabilities. In this connexion the
proportion of banks' cash to their liabilities on deposits is
usually a good index of their strength or weakness. The
position for the last five years for which statistics are avail-
able 1 is as under :

PERCENTAGE OF CASH TO LIABILITIES ON DEPOSITS.

1926.

1927.

1928.

1929.

1930.

Joint-Stock Banks:

%

%

%

%

o/

7o

(A) Capital and reserve

over 5 lakhs -

15

13

13

14

12

(B) Capital and reserve

between I and 5 lakhs -

24

15

15

13

12

The proportion in the case of banks with over 5 lakhs
of capital and reserve shows a continuous decline except
for a slight improvement in 1929. But the steady fall
in the cash position of the smaller banks is very noticeable.
A perusal of such statistics might lead one to expect a
large number of bank failures. 2 It is, however, striking
that bank failures in India, though not yet a thing of the
past, are on a decline in number as well as importance. This
can be seen from a study of the table 3 on page 100 in conjunc-
tion with similar tables given above. 4

Thus, during 1926-30, 66 banks failed with a paid-up
capital of R. 79 lakhs, or about 7 per cent, of the total
paid-up capital and reserve of the existing banks. This

1 Statistical Tables Relating to Banks in India for 1930, p. 7.

2 Cf. Indian Currency and Exchange, by J. M. Keynes, 1913, p. 225.

3 Statistical Tables Relating to Banks in India for 1930, p. 35.
* See above, pp. 90 and 94.

ioo THE MONETARY PROBLEMS OF INDIA

STATEMENT SHOWING FAILURES OF INDIAN JOINT-STOCK
BANKS, 1926-30.

1

! Number of

Capital.

Year, j Companies

Involved.

1

Authorised.

Subscribed.

Paid up.

R.

R.

R.

1926

14

7O,8o,OOO

7,05,815

3,9 8 > I 45

1927

16

69,30,000

6,88,372

3,IO,5l8

1928

13

81,70,000

31,65,740

23,H,7I7

1929

ii

1,50,50,000

24,99,050

8,18,972

1930

12

6,27,40,000

46,55,445

40-59, 6 44

compares quite favourably with 87 bank failures in 1913-17
involving a paid-up capital of R. 5 crores, or 51 per cent,
of the total paid-up capital of the existing banks, or with
91 bank failures in 1918-25 with R. 5*13 crores of paid-up
capital.

Geographical Distribution of Bank Failures, 1913-30. In
connexion with the Indian bank failures, a word may be
said relating to their geographical distribution. For this
purpose the table on page roi has been compiled.

Thus the Punjab has the highest number of bank failures,
having lost as many as 70 banks out of the 244 banks which
have failed in the whole of India during 1913-30. The next
piovinces in the order of casualties are the United Provinces
with 49 failures, and the Bombay Presidency with 39.

Why is it that, in respect of bank failures, these three
provinces fared so badly, while some parts, such as the
Central Provinces and Burma, have an almost clean record ?
The explanation seems to lie in the importance of these
three provinces as the trade marts of the country. The
Punjab is the greatest w r heat-producing province of India,
the United Provinces taking the next place. Bombay has
always been one of the principal ports and a centre for

THE MONEY MARKET (B), 1926-32 101

I

CO O l>vO iO

H I CO H

H CO OJ M CO H H

XT) M H H

CSJ CO

10 H

I

CO ^ lO CO *O I

<M VO M M I CO

O

H I <M

CO

CO

H Tj- CM H

rf IT) M

CO Tl" M

CO

ONOO I <M

ON
CO

c

O

3

PQ

102 THE MONETARY PROBLEMS OF INDIA

speculation, especially in cotton and in silver. Therefore,
during the Swadeshi movement of 1906-13, most of the new
banks were established in these provinces, particularly in
the Punjab, in order to take advantage of the growth of the
canal colonies there. When the crash came in 1913 and the
following years, these were naturally the parts which were
the worst hit.

Geographical Distribution of Banks in 1930. This brings
us to the question of the geographical distribution of the
existing joint-stock banks. But, before considering it, a
word may be said about the policy of the joint-stock banks
in regard to the extension of banking facilities within the
country. In this respect, the Indian joint-stock banks may
be contrasted with similar institutions in England and other
parts of the Empire, not to speak of other countries.
Although the Allahabad Bank which is the oldest surviving
joint-stock bank was established in 1865, it was not until
twenty-three years had elapsed that the first branch was
opened at Allahabad. In 1930 (the latest year for which
figures are available) there were only 937 head offices and
branches (including those of the Imperial Bank of India),
scattered over an area of 1,900,000 square miles, to serve
a population of 353 millions. 1

How exactly these banking establishments are dis-
tributed in the various provinces may be seen from the
table on page 103. It will be seen that the joint-stock banks
are fairly distributed in the Punjab, the United Provinces,
and the three Presidencies, thanks to the opening of a
hundred new branches by the Imperial Bank of India in
some districts which had been neglected by the Presidency
banks. 2 But there are still large areas where banking
facilities are inadequate, and, in this respect, the Indian
States are the most backward.

1 Latest Census figure, 1931.

2 See below, table on p. 118.

THE MONEY MARKET (B), 1926-82

103

GEOGRAPHICAL DISTRIBUTION OF JOINT-STOCK BANKS IN
INDIA IN 1930.

No. Name of the Province. No. of Banks.

I. Madras ----- 170

II. Punjab ----- 163

III. United Provinces - - - 107

IV. Bengal ----- 94
V. Bombay ----- 78

VI. Burma - 60

VII. Travancore - 59

VIII. Mysore ----- 29

IX. North-West Frontier Province - 28

X. Behar and Orissa - 28

XI. Sind ----- 25

XII. Delhi - 19

XIII. Central Provinces - 15

XIV. Baroda ----- 13
XV. Kashmir ----- n

XVI. Hyderabad - 8

XVII. Assam ----- 5

XVIII. Central India - 5

XIX. Cochin State - 4

XX. Rajputana - 4

XXI. Baluchistan ... - 3

XXII. Goa ------ 3

XXIII. Kathiawar - 3

XXIV. Gwalior ----- 2
XXV. Ajmer ----- i

Total - - 937

Banking Legislation. Before proceeding to consider the
exchange banks, reference may be made to the fact that there
is at present no banking legislation in India. Banks are
governed by the Indian Companies Act, certain sections of
which bear on matters such as registration, audit and
preparation and publication of balance sheets and state-
ments of affairs. In regard to certain matters, however,
the Act provides special provisions applicable to banks
only : l

1 Indian Banking Committee Report, 1931, para. 669. Also Bombay
Banking Committee Report. 1929-30, para. 285.

104 THE MONETARY PROBLEMS OF INDIA

(1) Section 4 prohibits partnership exceeding ten in number
from carrying on the business of banking unless it is registered
as a company, or is formed in pursuance of an Act of Parliament
or some other Act of the Governor General in Council, or of
Royal Charter or Letters Patent.

(2) Section 32 requires that an annual list of members and of
all places of businesses should be prepared and filed with the
Registrar.

(3) Section 132 with regard to the balance sheet requires
that full secured and unsecured debts should be shown separately,
but provision made for bad and doubtful debts need not be
shown. (The latter have to be shown in the case of all com-
panies other than banks.)

(4) Section 136 requires every limited banking company to
make a statement in a prescribed form before it commences
business and thereafter on the first Monday in August every
year.

(5) Section 138 provides that local government may appoint
one or more inspectors to investigate the affairs of a banking
company on the application of members holding not less than
one-fifth (in the case of other companies it is one-tenth) of the
share issued.

(6) Section 145 requires that if a banking company has branches
outside India the auditor will have access to such copies of, and
extracts from, the books and accounts of any such branch as
have been transmitted to the head office of the company in
British India.

(7) Section 259 requires a banking company which was in
existence on the ist May, 1882, to give notice to account holder
of its intention to register as a limited company at least thirty
days before registering.

2. EXCHANGE BANKS.

Nature of the Exchange Banks. Of the eighteen exchange
banks doing foreign exchange business in India, it is remark-
able that not a single one is Indian in origin. They are all
foreign banks with head offices abroad and only branches
in India. The reason is largely historical. It was about

THE MONEY MARKET (B), 1926-82 105

the middle of the nineteenth century, after the failure of
the agency houses, 1 that the necessity was felt for the
establishment of institutions for the purpose of financing
foreign trade. India's principal trade being with or via
England, it was but natural that banks were formed in
London with the object of doing exchange business with
India. The National Bank of India, under the name of the
Calcutta Banking Corporation, did establish itself first in
India with rupee capital in 1863, but it assumed its present
name in 1864 and transferred its head office to London,
converting rupee into sterling capital in 1866. Later France,
America, Japan, the Netherlands and other countries fol-
lowed England's example. 2 Branches of these foreign
banks were opened mainly at the Indian ports. Their
progress was fairly rapid, and today they form an important
and powerful group.

The Principal Five. Of the eighteen exchange banks,
eleven do most of their business outside India, while two,
viz. Messrs. Thomas Cook and Son (Bankers) and the
American Express Company Incorporated, deal chiefly in
tourist traffic. There are only five exchange banks which
transact a considerable proportion of their business in India.
They are the Chartered Bank of India, Australia and China,
the National Bank of India, the Mercantile Bank of
India, the P. & O. Banking Corporation and the Eastern
Bank. 3

Resources. The following table gives (in thousands of
pounds) the resources of the exchange banks for the pre-War
year 1913 and from 1919 to 1930 : 4

1 Indigenous Banking in India, pp. 141-2.

2 Eight banks have head offices in England, three in Japan, two in
Holland, two in the United States of America and one each in France,
Portugal and Hongkong. (Indian Central Banking Inquiry Committee
Report, 1931, p. 311.)

3 Indian Central Banking Inquiry Committee Report, pp. 310-11. In
Statistical Tables Relating to Banks in India for 1930, p. 5, the number of
such banks is stated to be six, but their names are not given.

4 Statistical Tables Relating to Banks in India for 1928 and for 1930, p. i.

io6 THE MONETARY PROBLEMS OF INDIA

Year.

No. of
, Banks.

Capital, Reserve
and Rest.

Deposits in
India.

Cash Balance
in India.

1913

12

37,825

23,276

4.4"

1919

II

53,070

55*7 6 9

22,487

1920

15

90,217

56,105

18,881

1921

*7

111,632

56,397

17,675

1922

18

112,221

55>038

12,132

1923

18

140,103

51,332

10,859

1924

18

130,464

52,976

12,275

J 925

18

I38,3H

52,909

7,062

1926

18

148,003

53,658

8,046

1927

18

180,919

51,647

6,098

1928

18

187,923

53,354

6,042

1929

18

227,625

49,994

6,785

1930

18

I93,6l()

51,086

5,782

An examination of the above statistics reveals several
interesting tendencies. To begin with, ever since 1922 the
number of the banks has remained constant at eighteen, but
their capital and reserve have shown, with the exception of
1930, almost continuous progress. At the same time their
deposits in India which, by the way, are almost as large
as those of the joint-stock banks so far from increasing,
have tended to decrease in recent years. But the position
of the cash balances in India is the least satisfactory of all.
In 1919 they amounted to 22,487,000, but in 1930 they
had fallen to nearly one-fourth, i.e., 5,782,000.

Business. The exchange banks do not finance the internal
trade except to a limited extent, but they have a virtual
monopoly of financing India's external trade. They are the
principal purchasers of bills covering imports and exports,
and they provide all the exchange facilities required by the
merchants engaged in India's foreign trade. In addition
they receive deposits both current and fixed and lend
against shipping and other documents.

The export trade is usually financed by means of sterling

THE MONEY MARKET (B), 1926-32 107

bills 1 D.A. or D.P., but generally the former in Calcutta
and the latter in Bombay, of three months' usance. The
import trade is financed mostly through sixty days' sight
D.P. bills drawn on the Indian importer in sterling or by
means of London bankers' acceptance of * house ' paper.

Economic Depression and the Exchange Banks. The busi-
ness of the exchange banks has been badly hit by the recent
economic depression. This is clear not only from the fall in
the figures of capital and reserve in 1930 but also from the
lower dividends paid by most of the exchange banks in 1931
and 1932 . The decline in dividends is all the more striking, if
it is borne in mind that for the preceding years the dividends
were in all cases uniform and in most cases higher than in
1931. The following figures 2 are for the five principal banks
already referred to :

Dividend per Cent, per Annum.

Paid-up
Capital.

1927.

1928.

1929. 1930.

1931-

1932.

Chartered Bank of India,

Australia and China

3,OOO,OOO

20|

20j

20^ 20 \

14

7*

National Bank of India -

2,2OO,OOO

2O

2O

2O 20

20

10*

Mercantile Bank of India

1,500,000

16

16

16

16

12

6*

P. and O. Banking Cor-

poration -

2,594,160 | 5

5

5

5

5 5

Eastern Bank

1,000,000

9

9

9

9

6

3*

* First half-year.

Contact with the London Joint-Stock Banks. An interesting
phase of exchange banking in India is its recent contact
with two of the leading London joint-stock banks, viz.
Lloyds Bank and the National Provincial Bank, Ltd. The
former took over in 1923 the well-known business of Messrs.
Cox and Company, which had in 1922 absorbed Messrs.

1 Drafts from and to Japan are drawn in yens, but in the case of China
they are in rupees. (Indian Banking Committee Report, 1931, para. 427.)

2 Commerce, 28th May, 1932, p. 909.

io8 THE MONETARY PROBLEMS OF INDIA

Henry S. King and Company, while the latter affiliated with
it the business of Messrs. Grindlay and Company in igzS. 1
Lloyds Bank has broken new ground by opening several
branches up-country, notably those at New Delhi in 1927,
at Lahore in 1928, and at Amritsar in 1930.

Merits and Demerits of the Exchange Banks. It is easy
to criticise the exchange banks and to exaggerate their
faults. But an impartial critic must admit that the exchange
banks alone are responsible for developing India's trade at
a time when no other banking agencies were available. The
large resources which these banks have commanded and the
prestige they enjoy on account of their age and strength
have all been harnessed to India's service, and it must be
recognised that that service has been performed not only
in the most efficient way, but also at fairly cheap rates.
Nevertheless the system has led to certain evil results.

For one thing, the financing of India's imports as well as
exports is by means of sterling bills, and Indian importers
can do business only on D.P. terms. This is peculiar to
Indian trade, and incidentally accounts for the lack of a
bill market in the country. As pointed out by the Indian
Central Banking Inquiry Committee, ' for the import
business of India ' the natural bill market is in India and
not outside India.' 2 Among other evils may be mentioned
the fact that resources raised by the exchange banks in
India are not employed in developing Indian industries, that
the share of Indians in the country's foreign trade is small,
that Indians are not employed in the higher posts of the
banks, and that there is alleged discrimination between
Indian and non-Indian customers. It is said that satis-
factory references are not supplied by the exchange banks
in respect of Indian merchants to overseas firms, while, in
order to get a confirmed letter of credit opened, even first-

1 The Imperial Banks, by A. S. J. Baster, 1929, p. 233.

2 Report of the Committee, para. 430.

THE MONEY MARKET (B), 1926-32 109

class Indian importing firms are required to make a deposit
of 10 to 15 per cent, of the value of goods with the exchange
banks, while European houses need make no such deposit.

The exchange banks deny most of the evils laid at their
doors, and definitely assert that they treat all customers
alike, and, indeed, it is not in their own interests to turn
down any business proposition which is intrinsically sound.
If, however, some Indian merchants experience difficulty in
securing sufficient accommodation, it is very often because
they do not offer the necessary balance-sheet evidence of
their financial standing.

Exchange Banks 1 Associations. Associations of the Ex-
change Banks exist everywhere, e.g. Calcutta, Bombay,
Madras, Rangoon and Karachi. Membership is open to all
banks, Indian and foreign, which do exchange business and
are willing to subscribe to the rules and regulations of the
Association. 1 The main functions of the Association are
' to maintain a uniform standard for certain routine opera-
tions, to secure harmony in the conduct of business and to
safeguard the rights of its members.' 2

Exchange Brokers' Associations. Reference may also be
made to the European Exchange Brokers' Associations in
Calcutta and to the European Exchange Brokers' Asso-
ciations in Bombay. The exchange banks deal, in respect
of the exchange business, with the members of these asso-
ciations only, and in Bombay, where the Indian Brokers
have not formed an association of their own, with such
Indian brokers as are on the approved lists. All brokers,
whether Indian or European, have to make a deposit of
R. 10,000 in cash or Government securities as a guarantee
that they would ratify their contracts, and they are, there-
fore, called deposit brokers. 3

1 At present no Indian bank is a member of the Association.

2 Indian Banking Committee Report, para. 618.

3 Ibid., para. 622.

no THE MONETARY PROBLEMS OF INDIA

3. THE IMPERIAL BANK OF INDIA.

First Banking Amalgamation. The foundation of the
Imperial Bank of India by a special Act of igao 1 marks the
first, and so far the only, important amalgamation of banks
in India. The Imperial Bank of India took over from the
27th January, 1921, the three Presidency Banks of Bengal
(founded in 1806), Bombay (1840) and Madras (1843). Ten
years have passed since then, and the revision of the Act,
though due in January I93I, 2 is still to come. The future
of the bank, in the light of the experience gained, is thus a
matter which calls for serious consideration and early
solution. The recommendations of the recent Banking
Inquiry Committee in this regard are of a far-reaching
character in their effect both upon the position of the
Imperial Bank of India and that of the Indian money
market. To the discussion of this subject we shall return
in Chapter VI. But in the meantime the working of the
Imperial Bank during the last ten years may be reviewed.

Capital and Reserve. The Bank started with an authorised
capital of R. 11,25,00,000 divided into 225,000 shares of
R. 500 each, all of which were subscribed, but of which
75,000 shares were fully paid up and 150,000 shares were
partly paid up at the rate of R. 125 each. The former were
the shares of the Presidency Banks exchanged for the shares
of the new Bank, while the latter were the new shares
allotted to the Presidency Banks in the same proportion as
they held the former shares. The amount of former capital
determined the reserve which each Bank undertook to
provide. Thus the contribution of the three Presidency
Banks was as follows :

1 Act XLVII. of 1920 passed by the Indian Legislature on the
September, 1920.

* The Act provides for an agreement between the Bank and the Secretary
of State, and this agreement, which was signed on the 2yth January, 1921,
is for a period of ten years terminable thereafter by either party on one
year's notice.

THE MONEY MARKET (B), 1926-82 in

Capital. Reserve.

Bank of Bengal : R- R -

40,000 shares fully paid up - 2,00,00,000 2,00,00,000
80,000 shares 25 per cent, paid - 1,00,00,000

Bank of Bombay :

20,000 shares fully paid up - 1,00,00,000 1,00,00,000

40,000 shares 25 per cent, paid 50,00,000

Bank of Madras :

15,000 shares fully paid up - 75,00,000 75,00,000

30,000 shares 25 per cent, paid 27,50,000

Total - 5,62,50,000 3,75,oo,ooo

The reserve, in the case of the Banks of Bengal and
Bombay, had previously stood at R. 2 crores and i crore
respectively, but in the case of the Bank of Madras, after
allowing for depreciation, it was regarded as R. 45 lakhs. 1
To bring up this reserve fund to the required amount of
R. 75 lakhs the shareholders of the Bank of Madras had to
pay a premium of R. 100 per share on the 30,000 new shares
allotted to them. 2 So the paid-up capital was, and still is,
R- 5*62,50,000, and the same amount represented, as it still
does, a reserve liability on the partly paid shares. The
Bank had an initial reserve fund of R. 3,75,00,000.

Constitution and Management By the Imperial Bank of
India Act ' the general superintendence of the affairs and
business of the bank ' is ' entrusted to a Central Board ol
Governors/ while ' Local Boards established at Calcutta,
Madras and Bombay, and at such other places in British
India as the Central Board, with the previous sanction of
the Governor-General in Council, may determine, shall have
powers generally to transact all the usual business of the
bank ' at such places. 3

The Central Board of Governors 4 consists of :

1 Actually it was R. 53,00,000.

* The new shares were offered at par to the shareholders of the Banks
of Bengal and Bombay.

3 Sections 24, 25 and 26 of Act XLVII. of 1920.

* Report of the Controller of the Currency, 1920-21, p. 31.

ii2 THE MONETARY PROBLEMS OF INDIA

(a) Managing Governors, not exceeding two in number,
appointed by the Governor-General in Council on the recom-
mendation of the Central Board.

(b) The Presidents, Vice -Presidents and Secretaries of the
Local Boards.

(c) The Controller of the Currency, or other officer nominated
by the Governor-General in Council; and

(d) Not more than four non-officials nominated by the Governor-
General in Council.

Representatives of any new Local Boards which may be
constituted but none has been yet constituted may be
added at the discretion of the Central Board. The Con-
troller of the Currency and the Secretaries of the Local
Boards are entitled to attend the meetings of the Central
Board but not to vote.

Kind of Business. The Imperial Bank of India Act of
1920 follows the same lines as the Presidency Banks Act
of 1876 in regard to the regulation and restriction of the
bank business generally. Under the Act the bank is not
permitted to deal in foreign exchange business or grant
unsecured overdrafts in excess of R. i lakh, and it is pro-
hibited from making advances for more than six months,
or upon the security of stocks or shares of the bank, or on
the original security of immovable property, or upon
promissory notes with less than two independent names.
Further, the bank cannot discount bills for, or lend or
advance in any way to, any individual or partnership firm
an amount exceeding at any one time R. 20 lakhs except
against specified securities 1 and goods or documents of title
thereto.

But the Imperial Bank of India Act is more liberally con-
ceived than were the Presidency Banks. To instance one

1 These are ' trustee stocks, funds and securities, securities issued by
certain State-aided railways, the debentures and other securities issued
by the district boards under the authority of the Legislature.' (Indian
Banking Committee Report, 1931. para. 34.)

THE MONEY MARKET (B), 1926-32 113

important point, it authorised the opening of a London
branch and the borrowing of money in London against the
assets of the Bank, although the opening of cash credits,
keeping cash accounts or receiving deposits in London is not
permitted, unless it is for a former customer of the Imperial
Bank of at least three years' standing or for a customer
of any of the old Presidency Banks.

London Branch. The London office of the Bank, opened
in January 1921, has taken over some, but not all, of the
Government business conducted by the Bank of England,
viz. the administration of the rupee debt in England and
the current account of the High Commissioner for India.
The Bank of England continues to administer the sterling
debt and the accounts of the Secretary of State. The London
branch is also the trustee and registrar of the Government
of His Exalted Highness the Nizam of Hyderabad State in
respect of the State railways.

There is an Advisory Committee of the Bank in London,
consisting of the Governor of the Bank of England, a promi-
nent merchant connected with Indian trade, and the London
Manager of the Bank, 1 ' in order that the Manager may have
the benefit of expert advice in the conduct of the business
of the Bank in London/ 2

Obligations and Privileges. Under the Act of 1920 the
Bank entered into an agreement with the Secretary of State
for India on the 27th January, 1921. By this agreement
certain obligations were imposed and certain privileges con-
ferred upon the Imperial Bank. As regards the former, the
Bank undertook (i) to conduct all general banking business
of the Government of India; (2) to open, within five years
of its inauguration, a hundred new branches, the location
of twenty-five of which were to be determined by the

1 At present the Committee consists of the Governor of the Bank of
England and the Manager of the London office of the Imperial Bank.
8 Report of the Controller of Currency for 1924-25, p. 24.

8

H4 THE MONETARY PROBLEMS OF INDIA

Government of India; and (3) to conduct the management
of the public debt for a fixed remuneration.

On the other hand, the Bank was permitted to hold all
the Treasury balances, wherever the Bank had a branch
office. It was also given the privilege of transferring its
funds through ' currency ' free of charge. The Government
agreed not to issue any ' Currency Transfers ' or ' Supply
Bills ' between any two places where a branch of the Imperial
Bank might be located. The Bank, in return, undertook
to offer every facility to the public for the transfer of funds
from one branch office to another, at rates not higher than
those to which the Controller of the Currency should signify
his approval.

Resources of the Bank. The following table shows the
resources of the Imperial Bank ever since its foundation in
1921. A fall in the reserve and public deposits is of course
due to the recent economic depression.

(In Thousands of Rupees.)

On
3 1 st December

Paid-up Reserve.
Capital.

i

Public
I Deposits.

Other
Deposits.

1921 5,62,24 4,!4,54

6,8o,OI

65,77,79

1922 5,62,50

4,33,07

14,15,73

57,oo,57

1923

5,62,50

4,55,21

8,56,94 ! 74,19,51

1924 5,62,50

4,80,08

7,50,26 1 76,71,22

1925 5,62,50

4,92,73

i 5,46,44 77,^3,33

1926 5,62,50

5,09,50

! 6,45,36 73,89,70

I927 1 5,62,50 | 5,24,07

i 7,20,23

72,07,22

1928' 5,62,50

5,39, 22

7,94,86

71,30,44

1929'

5,62,50

5,47,76

7,59,97

71,64,31

1930 5,62,50

5,40,00

7,36,91

76,60,06

1 The figures of reserve for 1927, 1928 and 1929, as given in the States-
man's Year Book, 1932, p. 142, are R. 5,12,50, R. 5,22,50 and R. 5,32,50
respectively. There seems to be an error. The figures given in the above
table are those given in the Statistical Tables Relating to Banks in India
for 1930, p. i, and also in the Statistical Abstract for British India, 1932,
P- 336.

THE MONEY MARKET (B), 1926-32 115

To form a better idea of the working of the Imperial
Bank, the following table has been compiled from the half-
yearly reports and balance sheets :

Half-Year
Ending

Average
Rate of
Interest.

Net Profits.

Divi-
dend.

Contribu-
tion to
Reserve.

3oth June, 1921
3ist Dec., 1921

Per Cent.
6-038
5-108

Us. As
58,14,792 13

62,27,657 o

Ps.

8
9

1

Per Cent, j

16 ,
16

Ks.
IO,OO,OOO
IO,OO,OOO

30th June, 1922 7-132
3ist Dec., 1922 4-510

63,52,241 13
52,88,563 II

2
II

16
16

IO,OO,OOO
IO,OO,OOO

30th June, 1923 7-419
3ist Dec., 1923 4-5

76,01,175 II
49,13,332 I

2
I

16
16

I2,5O,OOO
IO,00,OOO

3oth June, 1924
3ist Dec., 1924

8-05
5-3I5

78,81,700 2
49^5,355 15

i 16
9 16

12,50,000
IO,OO,OOO

3oth June, 1925
3ist Dec., 1925

6-585
4-701

69,39,660 II

38,25,044 8

7
8

16
16

IO,OO,OOO
5,OO,OOO

3Oth June, 1926
3ist Dec., 1926

5-65I

4

74,27,354 6
35,49,327 13

6
4

16
16

IO,OO,OOO
7,5O,OOO

3Oth June, 1927
3ist Dec., 1927

6-508
4-956

76,15,229 13
34,81,731 ii

9 16
o 16

7,50,000
5,OO,OOO

3Oth June, 1928
3ist Dec., 1928

6-945
5-456

7i,38>557 7
40,51,094 13

6
3

16
16

5,00,000
5,00,000

30th June, 1929 6-878
3ist Dec., 1929 5-778

64,59>309 4
40,99,687 n

8
6

16
16

5,00,000
5,00,000

30th June, 1930 6-508
3ist Dec., 1930 , 5-277

65>58,996 8
36,14,852 7

ii
o

16
I 16

5,00,000
2,50,000

30th June, 1931
3ist Dec., 1931

6-735
7-353

54,53,969 6
19,45,773 7

3
6

12
12

2,50,000
nil.

30th June, 1932
3ist Dec., 1932

6'022
4*03

60,97,600 o
36,95,100 o

12
12

15,00,000
2,50,000

n6 THE MONETARY PROBLEMS OF INDIA

A close analysis of the above table will reveal the de-
pressing fact that the Imperial Bank has failed during the
last six years to maintain the progress which it made during
the first six years of its existence. The average net profit
in the first six years is R. 118 lakhs and in the last six years
R. 100 lakhs, while the average annual contribution to the
Reserve Fund during the same periods is R. 19,60,000 and
R. 12,00,000 respectively. The reason lies in the fact that the
first six years were a period of boom, the last six a period
of trade depression. The abnormality of the year 1931 is
obvious from the exceptionally high rate of interest, lowest
net profits and absence of contribution to the Reserve Fund
during the latter half of the year. The year 1932 shows
remarkable recovery, presumably due to the gold exports.

Implications and Limitations. We must now address
ourselves to three important questions. ' Firstly, what is
the constitutional position of the Imperial Bank of India
among the central banks of the world ? / Secondly, what is
the position of the Bank, as conceived by the Act of 1920,
in the Indian money market ? Thirdly, in what manner
and to what extent, if at all, have these conceptions been
affected by actual practice during the last ten years' working
of the Bank ?

Taking the first question, it may be said at once that the
constitution of the Imperial Bank, as embodied in the Act
which brought it into being, falls short in several essentials
of that of a central bank of either the English or the Con-
tinental or even the South African type. But the dis-
advantages from which the Imperial Bank suffers need not
be exaggerated. In the first place, the Imperial Bank of
India Act specifically requires the Bank to act as Govern-
ment banker, a function admittedly appropriate to a central
bank. Secondly, and this may be emphasised, there is
nothing in the Act to prevent the Bank from pursuing a
policy which may enable it to occupy the position of a

THE MONEY MARKET (B), 1926-82 117

bankers' bank, which again is a function appertaining to
a central bank. Of course the Act of 1920 permits the Bank
to conduct general banking business, with the consequent
possibility of coming into competition with other banks
and thereby prejudicing its capacity to play the role of a
bankers' bank. This, however, is an objection which carries
weight only with advocates of English and American central
banking policy. On the Continent, commercial banking is
not incompatible with central banking business. The answer
to the question as to which of the two systems is more suited
to Indian conditions, though important, does not affect the
possibility of the Imperial Bank becoming a bankers' bank.
Where, however, the Imperial Bank of India Act of 1920
does fall below the ideal of central banking legislation is the
withholding from it of the powers of note issue, and thereby
of the capacity to unify and control the currency and credit
policy of the country.

Now as to the other questions regarding the position of
the Imperial Bank in the Indian money market and its
actual working. The goal set up for the Bank to aim at
was the development of the banking habits of the people.
In the first place, the Bank was to be the custodian of the
national balances and the manager of the public debt.
In the second place, it was to extend banking facilities
within the country, by opening new branches. In the third
place, with its large resources, both public and private, it
was to facilitate the internal movements of funds and ease
the seasonal stringency in the money market.

Government Deposits. Taking the first function first, the
Indian Finance in its special Banking Inquiry Number of
January 1930 (p. 5) complained that Government deposits
with the Imperial Bank, ' which a few years ago used to
work out to an annual average of Rs. 15 crores to Rs. 20
crores, have declined owing to the Indian Treasury's low
cash balances, which have been the marked feature of

n8 THE MONETARY PROBLEMS OF INDIA

Government's finances in recent years. The present annual
average might work out to about Rs. 7 crores.' That this
is no longer the case may be seen from the recent figures 1
given below, although they are much lower latterly as com-
pared with 1926-27.

(In Lakhs of Rupees.)

1926-27. 1927-28. 1928-29. 1929-30. 1930-31. 1931-32-
Average - 19,99 10,56 8,02 14,87 13,19 11,77

Establishment of Branches. As regards the opening of a
hundred new branches, the Bank duly fulfilled its obligation
by 3ist March, 1926. In 1926-27 the position was as shown
in the following table : 2

No. of Branches

Since

Provinces.

in Existence before
January 1921.

January 1921.

Total.

Bengal -

6

9

J 5

Behar and'Orissa -

i

8

9

Assam -

2

2

United Provinces -

5

18

23

Punjab -

2

17

19

N.W. Frontier Province -

3

3

Burma -

3

3

6

Bombay -

14

9

23

Madras -

18

15

33

Central Provinces -

3

7

10

Minor Provinces

i

2

3

Indian States

5

8

13

Ceylon -

i

i

1

59

101

160

It is striking to note that no new branches have been
opened since March 1926. This is explained by the declared
policy of the Bank that they wish to consolidate their
existing establishments before embarking upon new ventures.

1 Reports of the Controller of the Currency, 1928-29 and 1931-32, pp. 41
and 57 respectively.

2 Report of the Controller of the Currency for 1926-27, p. 20.

THE MONEY MARKET (B), 1926-32 119

The question naturally arises as to how many of these
branches have by their new business proved to be a successful
proposition. The answer is furnished by the following
table: 1

NEW BRANCHES.

Number of new branches working at a Profit (inclusive of
interest received from or paid to Head Office Account) - 32

Number of new branches working at a Loss (inclusive of
interest received from or paid to Head Office Account) - 56

The position is, however, not so bad as it might appear
at first sight from these figures. It must be remembered
that they relate to the end of 1925, when some of the new
branches were hardly a year old and unlikely therefore to
show any results. More recent statistics are not available,
but the remark of the recent Banking Inquiry Committee
that ' several of the branches, however, have not yet reached
a profit-earning stage/ seems to suggest that a good number
of the fifty-six branches which were unsuccessful in 1925
were no longer so in 1931.

Inland Remittances. Coming to the facilities afforded by
the Imperial Bank for inland remittances, it will be recalled
that the Act of 1920 provided that all Treasury balances
were to be placed in the hands of the Imperial Bank wherever
the latter had a branch office. This meant, in the first
place, the abolition of the Reserve Treasuries in such areas
and, in the second place, the release of large Government
funds to be used by the Bank for assisting the money market.
As the Bank offers transfer facilities at fairly low rates
previously approved by the Controller of the Currency, 2

1 Royal Commission on Indian Currency and Finance, Minutes of
Evidence, 1926, vol. iv., p. 479.

8 For amounts of R. 10,000 and over - - - i anna per cent,
of R. 1,000 but less than R. 10,000 2 annas per cent.
,, less than R. 1,000 - - - At the discretion of

the bank.

(In 1923-24 the i anna rate was reduced to k anna per cent, for banks
in order to assist them.) (Report of the Controller of the Currency for 1920-21 ,
P- 32-)

120 THE MONETARY PROBLEMS OF INDIA

it does not itself derive much profit from this kind of business,
but it is a valuable concession to the constituents. Besides,
in actual transactions the public is afforded much greater
convenience than they ever had under the old scheme of
things. That inland transfers, through the agency of the
Imperial Bank, are considerable in volume, in spite of recent
diminutions as a consequence of a fall in the price-level,
may be seen from the statistics given on p. 121.

Bankers' Bank. Now we come to the consideration of
the interconnection between the Imperial Bank and the
Indian joint-stock banks. The complaint is sometimes
made that 1 the Imperial Bank has come into competition
with the Indian joint-stock banks, with the result that money
rates have tended to be reduced, to the disadvantage of the
latter. This question of competition need not be exagger-
ated. It is sometimes forgotten that in at least seventy-
five places there is no bank except a branch of the Imperial
Bank. The question of competition only arises, therefore,
in about a hundred places, where there are joint-stock banks
as well as branches of the Imperial Bank. And if rates of
interest have come down in these places, they only show
that joint-stock banks have been deprived of their monopoly
to the advantage of the public. Again, if the Imperial
Bank has large Government balances for use free of interest
which give it an advantageous position over other banks,
it must not be lost sight of that it is also subject to certain
severe restrictions, such as the prohibition of dealing in the
profitable business of foreign exchanges from which the
latter are free. Further, the Government balances them-
selves have appreciably decreased in recent years. 2

On the whole the relations of the Imperial Bank with
the joint-stock banks appear to be cordial. Most of the
Indian joint-stock banks keep accounts with the Imperial

1 Royal Currency Commission, 1926, Minutes of Evidence, vol. iv., p. 479.

2 See above, p. ri8.

THE MONEY MARKET (B), 1926-32

121

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122 THE MONETARY PROBLEMS OF INDIA

Bank. The total bankers 1 balances with the Imperial Baftk
in recent years are shown below. 1

(In Lakhs of Rupees.)
Exchange Indian Joint-

Banks. Stock Banks.

3ist March, 1928 - - 3,20 81

30th September, 1928 - 3,71 1,12

3ist March, 1929 - - 3,28 81

3oth September, 1929 - 2,02 90

3ist March, 1930 - - 1,88 81

3oth September, 1930 - 1,88 1,05

Clearing Houses. The Imperial Bank also conducts the
clearing house business in India (and Ceylon) at eleven
centres, viz. Ahamdabad, Bombay, Calcutta, Cawnpore,
Colombo, Delhi, Karachi, Lahore, Madras, Rangoon and
Simla. The actual business of the clearing house is carried
on in the offices of the Imperial Bank at these centres, and
representatives of other banks meet under the supervision
of an officer of the Imperial Bank, which provides the neces-
sary staff. A bank can become a member of the clearing
house by the consent of the existing members. The Imperial
Bank has no more voice in the matter than any other member
of the clearing house.

Imperial Bank of India Amendment Bill, 1927. The
foregoing review of the progress of the Imperial Bank would
be perhaps incomplete without a brief examination of the
Imperial Bank of India Amendment Bill which was introduced
in the Indian Legislative Assembly along with the Reserve
Bank Bill in 1927. The Imperial Bank Bill sought to free the
Bank from some of its existing shackles in regard to business.
Some of the salient features of the Bill as modified by the
Joint Committee of the Central Legislature are given below.

' (a) The Imperial Bank should under arrangements with the
Reserve Bank of India act as agent of the latter in places where
the Reserve Bank has no branches.

(b) The provision that gives power to the Governor-General
1 Indian Banking Committee Report > 1931, p. 34.

THE MONEY MARKET (B), 1926-32 123

to issue instructions to the Bank in respect of certain matters
should be repealed.

(c) Power should be given to the Bank to establish branches
or agencies at such places in India or elsewhere as it deems
advantageous.

(d) The Central Board should consist of the following Gover-
nors: (i.) the President and the Vice-President of the Local Boards
established by the Act ; (ii.) a Managing Governor appointed by
the Central Board ; (iii.) a Deputy Managing Governor appointed
by the Central Board; (iv.) the Secretaries of the Local Boards
established by the Act ; and (v.) such number of persons to repre-
sent any Local Boards established hereafter as the Central Board
might prescribe. The Deputy Managing Governor should be
entitled to vote in the absence of the Managing Governor, but the
Governors specified in clause (iv.) should not be entitled to vote
and they will be given only the power to take part in the delibera-
tions of the Board.

(e) The Bank should be authorised to make advances and open
cash credits on the security of debentures issued under the
authority of a Municipal Board or Committee.

(/) The Bank should be empowered, subject to any general or
special directions from the Central Board, to make advances and
open cash credits on the security of fully paid shares and deben-
tures of companies with limited liability whether registered in
India or elsewhere.

(g) The Bank should be allowed to advance freely on hypotheca-
tions instead of being restricted to making advances only against
goods in possession.

(h) The Bank should be allowed to buy and sell foreign bills
of exchange.

(i) The existing restrictions on the borrowing of money in
England by the Bank should be removed.

(j) The statement of the balance of the Bank should contain
the particulars, and should be in the form required by section 132
of the Indian Companies Act of 1913, and the provisions of
section 136 of the same Act should apply to a banking company.

(k) Various administrative defects in the working of the Bank
should be removed.' 1

1 Indian Banking Committee Report, 1931, para. 527

124 THE MONETARY PROBLEMS OF INDIA

Two interesting points must be noted. In the first place,
provision was made in the above Bill to require the Imperial
Bank to satisfy the very important obligations of Sections
132 and 136 of the Indian Companies Act, from which it
was free and to which all joint-stock banks were subject.
In the second place, some important restrictions, e.g. those
concerning foreign exchange banks, were left intact in view
of the special position which it was thought the Bank would
occupy even after the formation of the Reserve Bank.

Banking Education. A word may be said about banking
education, which in India is of recent origin and in infancy.
In the year 1929 there were only 7 colleges with 1,599
students and 149 schools with 7,069 students receiving
education in commercial subjects in the whole country.
The existing institutions providing the study of commercial
subjects, including banking, are classified by the Indian
Banking Committee as follows: 1

(a) Commercial schools preparing students for a certificate
or diploma.

(b) Secondary schools where commercial subjects are taught
as optional subjects or to which separate commercial classes
are attached.

(c) Universities awarding either a special degree in
commerce, or the general arts degree, after a study of
economics and other cognate sciences. Theoretical in-
struction for the B.Com. degree is imparted either in
a special department of the University or at a separate
institution specialising in such subjects and affiliated to the
University. Examples of the former type are furnished by
the Department of Commerce established by the unitary
teaching Universities of Lucknow and Allahabad and of
the latter type by the Sydenham College of Commerce of
the Bombay University and the Hailey College of Commerce
affiliated to the Punjab University.

1 Indian Banking Committee Report, 1931, para. 750,

THE MONEY MARKET (B), 1926-82 125

(d) The Indian Institute of Bankers.

As the Banking Committee points out, there is at present
no co-ordination of efforts between the Universities and the
banks in India in the matter of banking education. The
Universities have not made any serious efforts to give

JOINT-STOCK BANKING IN GREAT BRITAIN AND IRELAND AND IN
INDIA, 1929-30.

(In Millions of 's.)

200

100

boo

40, J 000

20000

10,000

8

Capital & Reserve

Deposits

Bank Clearings

N.B. i. The entire blocks represent Great Britain and Ireland.

2. The shaded portions represent India. (Imperial Bank of India

and Indian Joint- Stock Banks. The deposits include those of
the Exchange Banks doing business in India.)

3. Actual figures are given inside the blocks and shaded portions.

4. Indian figures are converted into Pounds at is. 6d. rate.

practical turn to their theoretical teaching of commercial
subjects. The banks have not cared much for either such
theoretical instruction or to supplement it themselves by
providing practical training. The two honourable exceptions

126 THE MONETARY PROBLEMS OF INDIA

are the Imperial Bank of India and the People's Bank of
Northern India (now in liquidation), but even in their case
there is much room for improvement.

Joint-stock Banking in India and the United Kingdom.
This review of the development of joint-stock banking may
be concluded by a statistical comparison of the position
of the Indian joint-stock banks, in respect of their resources,
with that of the joint-stock banks in the United Kingdom
of Great Britain and Ireland. With this object in view the
diagrams on p. 125 have been constructed.

CHAPTER V
THE MONEY MARKET (C), 1926-82

i. POST OFFICES.

Origin and Development. So little is known about the
origin and development of the credit facilities provided by
the post offices and the increasing part they have played
in the Indian money-market in recent years that a brief
historical review of the subject will not be out of place.
The bank failures of the early nineteenth century led to the
opening of the first three Government savings banks in the
three Presidency towns of Calcutta, Madras and Bombay in
1833, 1834 an d I 835 respectively 1 for the investment of
savings of ' all classes British and Native/ 2 Between 1863-65
the management of these savings banks was made over to the
Presidency banks. It is interesting to notice that the first
regulations permitted a maximum deposit of R. 500 only.
Gradually the limit was increased to R. 3,000 with interest at
4 per cent. But since quite a number of persons deposited
the sum of R. 3,000 at once, the rule was amended so that no
one could deposit in one account more than R. 500 within a
year. In 1870 District Savings Banks were opened all over
India with the exception of Calcutta and the Presidencies of
Bombay and Madras. The year 1882 saw the opening of
Post Office Savings Banks all over the country except in the
Presidency towns, and the number of savings banks con-
sequently increased from 197 to 4,243. 3

1 In England the Post Office established a Savings Bank Department
in 1861.

* The Post Office of India and its Story, by Sir Geoffrey R. Clarke.
1921, p. 81. a Clarke, op. cit., p. 82.

127

128 THE MONETARY PROBLEMS OF INDIA

The Savings Bank Panic of 1914. The history of Post
Office Savings Banks in India from 1882, the year of their
commencement, to the present time may be said on the whole
to be one of continual prosperity and expansion. But on
the outbreak of the War in 1914 there was a serious panic
owing to the news of the temporary confiscation of savings
bank deposits by the German Government in Germany.
Within a few months about 10 crores of rupees were with-
drawn from savings banks in India, but the bold manner
in which the Government of India met all demands
served to allay all fears and gradually reassured the public
mind. 1

Post Offices as Bankers and Stock-Brokers. The post
offices are at present the bankers and stock-brokers of a
large number of persons of all classes and especially of the
educated and middle classes. They provide facilities for
saving and investment in four ways viz., (i) by receiving
deposits in their savings banks, (2) by issuing postal cash
certificates, (3) by purchase and sale of Government securities
for the public free of charge, and (4) by offering life assurance
policies.

Post Office Savings Banks. The number of Post Office
Savings Banks is 12,8462 much larger than that of joint-
stock banks. Savings banks exist all over India in all head
offices, all sub-post offices and some branch post offices.
They are an undoubted boon to the small investor. The
object of Government in establishing them is to provide
a ready means for the deposit of savings and so to encourage
thrift. Savings banks are not to be used for the purpose
of keeping a current account, and the Deputy Accountant
General Posts and Telegraphs is empowered to close ac-
counts or, in the case of accounts opened on behalf of minors t
to stop the receipt of further deposits should he have reason

1 Clarke, op. cit. t p. 87.

8 Last official figures, contained in the Annual Report of the Indian Posts
and Telegraphs Department for the Year 1930-31, p. 19.

THE MONEY MARKET (C), 1926-32 129

to believe that the accounts are being used for a purpose for
which the savings banks are not intended. 1 According to
the current rules (1932) , 2 the net deposits in any year (ist
April to 3ist March) must not exceed R. 750. The maximum
total balance allowed to be held at any time, exclusive of
interest for the current year, is R. 5,000 in the case of an
adult, and R. 1,000 in the case of an account opened on behalf
of a minor by a relative or guardian. Sums as small as four
annas (roughly 5d.) can be deposited at a time, as often as
desired, but withdrawals are allowed only once a week. A
pass-book is issued to every depositor in the vernacular
of the district or in English at his option, and it must be
produced whenever a deposit or withdrawal is made. Interest
is allowed at the rate of 3 per cent, per annum for each
calendar month on the lowest balance of complete rupees
at credit of an account between the close of the fourth day
and the end of the month.

Statistics relating to the Postal Savings Banks for the
last five years are as follows : 3

Outstandings

v No. of
* ear ' Depositors.

; Deposits.

With-
drawals.

Net

Deposits.

Inclusive of
Interest at

1

End of Year.

| R. '00,000.

R. '00,000,

R. '00,000.

R. '00,000.

1926-27 2,518,142

! 21,17

18,89 2,28

29,51

1927-28 2,606,071

, 24,00 20,84 3> I 6

32,67

1928-29*

2,020,832

1 27,22 25,39 !> 8 3 3449

1929-30

2,304,904

I 27,28 24,64 2,64 37,13

1930-31

2,478,000

! 27,82 5

28,97 1,15 37.03

1 Post and Telegraph Guide, Official Copy, April 1932, p. 135.

2 Ibid., pp. 135-46.

3 Compiled from Statistical Abstract for British India, 1932, p. 684.
Figures for 1930-31 aretaken from the Statesman's Year Book, 1932, p. 142.

4 In Indian Central Banking Committee Report (p. 36) the receipts, with-
drawals and net deposits for 1928-29 are given as R. 26,22, R. 24,40 and
U. 1,82 lakhs respectively.

% The latest available hgure (August, 1932) of Post Office Savings Banks
Deposits in Great Britain is 292,000,000.

130 THE MONETARY PROBLEMS OF INDIA

From the above table it is clear that with the exception
of 1930-31, which was an abnormal year, the figures of de-
posits invariably exceed withdrawals, and there is, therefore,
a credit balance on the working of any one year. Further,
it may be noted that both deposits and withdrawals are
growing, the figures of withdrawals being excessive in 1928-29
owing to the general calamities of that year (which incident-
ally explain the fall in the number of depositors in the same
year) , and in 1930-31 owing to the economic and financial crisis.

The classes which use the Post Office Savings Banks are
chiefly Government servants and servants of local bodies and
railways, professional men, teachers, students and a few
servants. The United Provinces Banking Inquiry Com-
mittee had some 10 per cent, of the savings bank accounts
in one of the largest offices of the province classified by
occupations. The results of the classification show that
' out of 2,600 accounts only 400, or 15*3 per cent., were rural;
whilst of that figure a considerable proportion belong to per-
sons whose habits of life are in reality urban, and who are only
resident in rural areas by reason of their occupation, such as
Government and railway officials, teachers and shopkeepers/ 1

Post Office Cash Certificates. The Post Office Cash Certifi-
cates in India, like the National Savings Certificates in
England, were for the first time introduced during the War
in 1917-18 with a view to encouraging thrift and saving.
They constitute a very popular form of investment for
persons of moderate means who wish to combine the maxi-
mum yield with minimum risk. The rate of interest free
of tax works out on different issues between the maximum
of 6 per cent, and the minimum of 4^ per cent, and is at
present (1932) at the maximum. 2 Certificates issued between
(i) the 2nd April, 1917 and the ist April, 1923, (2) the ist

1 United Provinces Banking Inquiry Committee Report, 1929-30, para. 500
- With effect from the 3rd January, 1933, the rates have been lowered,

the five-year Cash Certificates of the denominations of R. 10 being now

available on payment of R. 8 instead of R. 7/8.

THE MONEY MARKET (C), 1926-32

April, 1926, and the 3oth June, 1927, and (3) the ist August,
1929 and I4th September, 1930, bore interest at approxi-
mately s per cent, per annum; those issued between the
ist July, 1927 and the 3ist July, 1929 earned 4^ per cent.,
while the rest i.e., those issued between the 2nd April, 1923
and the 3ist March, 1926, and all issues since the I5th Septem-
ber, 1930 enjoy 6 per cent. Statistics of issues and discharges
for the period 1926-27 to 1931-32 are given below:

(In Lakhs of Rupees.) 1

TSJ4-

Outstandings

Year.

Receipts.

Repayments.

iNCL

Receipts.

at End of the
Year.

1926-27

7.53

1,82

5,7*

26,68

1927-28

6,08

2,06

4,02

30,70

1928-29

4,9i

3.3i

1, 60

32,30

1929-30

7,i5

4,45

2,70

35,oo

1930-31

11,78

8,34

3,44 38,44

1931-32

14,49

8,33

6,16

44,59

The fall in the receipts in 1927-28 and the following year
is explained partly by the reduction in the interest rate to
the lowest figure of 4^ per cent, on the ist July, 1927, and
partly by the distressing conditions of 1928-29. Since then
the receipts have been growing, stimulated no doubt by the
rise in the interest rate to 5^ per cent, with effect from the
ist August, 1929, and to 6 per cent from the I5th September,
1930.

Purchase and Sale of Government Securities. The facilities
afforded by the Post Office in regard to the purchase and
sale of Government securities are very great. 2 Any person
is entitled to invest through the Post Office in any loan
issued by the Government of India bearing interest at 3^ per

1 Report of the Controller of Currency, 1931-32, p. 24. In England the
yearly total of the sales of Savings Certificates amounted to 64,862,229
in 1931.

2 This account is based on Post and Telegraph Guide, Official Copy,
April 1932, p. 146 et seq.

132 THE MONETARY PROBLEMS OF INDIA

cent, or upwards. The maximum limit for such investment,
after deducting any sum sold through the Post Office, by an
individual in any official year is R. 5,000. An investor may
at his option purchase either Government promissory notes
or stock certificates. The chief advantage of the latter is
the fact that they are not negotiable by endorsement, and
are consequently of no value in the hands of a wrongful
holder (Rule 46). l

The Post Office also undertakes to sell any securities
purchased through it, provided that the investor is a savings
bank depositor at the time of application, and that if only a
portion is specified for sale, the balance of securities left after
the sale is of the nominal value of R. 100 or a multiple of
R. 100. Investment certificates tendered for sale by an in-
vestor are sold outright unconditionally (Rule 47). 2

Any investor with a savings bank account may tender at
a Post Office Savings Bank securities for safe custody up to
a limit of R. 22,500. This limit applies only to securities the
interest on which is liable to income-tax, unless they are re-
tained in the custody of the Post Office, and not to securities
which originally are declared income-tax free (Rule 48). 3

No fee, commission, or brokerage of any kind is charged
for the purchase, sale, safe custody or delivery out of custody
of Government securities bought through the Post Office,
or for the realisation and remittance of interest on such
securities. So long as Government securities purchased
through the Post Office remain in the custody of the Ac-
countant-General, Posts and Telegraphs, the interest thereon
is exempt from income-tax (Rule 50) . 4

The following statement 5 gives details of the purchase and
sale of Government securities through the agency of the
Post Office for 1930-31 compared with the year 1925-26 :

1 Post and Telegraph Guide, Official Copy, April 1932, p. 146.

2 Ibid., p. 147.

Ibid., p. 148. 4 Ibid.

6 Annual Report of the Indian Posts and Telegraphs Department for the
Year 1930-31, p. 20.

THE MONEY MARKET (C), 1926-32

133

1925-26.

1930-31.

Increase ( 4- ) .
Decrease (-).

Number of investments -
Nominal value of invest-

1,818

5,018

+3,2OO

ments (rupees)
Number of sales
Nominal value of securi-

34,94,400
1,249

90,09,000
1,056

+ 55I4>600
-193

ties held in custody

of Accountant-General,

Posts and Telegraphs,
at close of year (rupees)

4,92,87,750

5,78,43,325

+85,55,575

Post Office Insurance Scheme. The Post Office offers
insurance facilities of several kinds which are open to all
permanent and some temporary Government servants, to
servants of local bodies and to permanent servants of all
Universities established by Government. The facilities con-
sist of (i) life insurance i.e., the payment of a fixed sum of
money on the death of an individual to his legal representa-
tives or assigns; (2) endowment assurance i.e., the payment
of a fixed sum of money to an individual at some specified
future date or to his assigns at his death, if death occurs
before specified date; and (3) monthly allowance, the pay-
ment of which may begin immediately or at some specified
future date. The life insurance and endowment assurance
policies have the minimum and maximum limits of R. 100
and R. 10,000 respectively, while the monthly allowance
ranges between eight annas and fifty rupees. The premia on
the policies are payable monthly, while for monthly allowances
either a lump sum payment or payment by ^monthly instal-
ments extending over a period of at least five years is made.

Growth of the Post Office Insurance Fund. The progress of
the Post Office Insurance Fund between 1925-26 and 1930-
31 can be seen from the following statement. 1

1 Annual Report of the Indian Posts and Telegraphs Department for the
Year 1930-31, p. 21.

134 THE MONETARY PROBLEMS OF INDIA

Up to Up to

3ist March, 1926. 3ist March, 1931 .

Number of lives insured - 69,918 108,329

R. R.

Amount received in premia - 3,86,40,512 6,42,99,060

Amount of insurance - - 11,80,84,756 18,87,03,084

Amount of claims met - - 2,14,84,500 3,50,52,553

2. GOVERNMENT LOAN OPERATIONS.

Method of Issue. The importance of Government loans in
the Indian money market is not adequately realised, but can
hardly be exaggerated. The method of their issue is quite
simple. Whenever Government wants to borrow funds it
issues a notification giving the details of the loan e.g., the
issue price, the rate of interest, whether loans are repayable
at par or at premium, date of issue and closing and method
of repayment. For a Government loan one may apply to the
Controller of the Currency, Calcutta, Accountant-Generals
Madras and Rangoon, to any branch of the Imperial Bank,
or to any Government treasury.

Main Forms. Rupee loans of Government are mainly of
three kinds viz., Stock Certificates, Bearer Bonds and
Promissory Notes.

Stock Certificates are registered at the Public Debt Office,
and they can be transferred only by registration in that
office. Fresh stocks can be issued in case of loss by ex-
plaining the circumstances to the Public Debt Office.
Interest on Stock Certificates can be collected half-yearly
without actually producing them.

Bearer Bonds, like currency notes, are transferable from
hand to hand, and are encashable on due date without any
formalities. The bonds have coupons attached to them,
on the production of which interest is realised when due.

Promissory Notes can be transferred by endorsement alone
in the space specially provided for the purpose. They
must be produced at the time of collecting interest.

THE MONEY MARKET (C), 1926-82 135

Stock Certificates, Bearer Bonds and Promissory Notes
are inter-convertible on payment, except in the case of
Stock Certificates, of a fee of 4 annas per cent, on securities
not exceeding R. 400 and of i rupee per security over
R. 400.

Other Forms. Other forms of Government loans in India
are Treasury Bills and Postal Cash Certificates. The latter
have been described already. The former are issued always
at a discount, and are repayable in three, six, or twelve
months. Tenders are invited by notification by the Con-
troller of the Currency, Calcutta. They are received by
him and also by the Deputy Controller of the Currency,
Bombay, the Accountant-Generals of Madras and Rangoon,
and by the Currency Officers, Cawnpore, Lahore and Karachi.
The lowest tenders are accepted. The Treasury Bills are
issued from and paid at the local Head Offices of the Imperial
Bank of India, Bombay, Calcutta and Madras, and at
branches at Cawnpore, Rangoon, Lahore and Karachi.

The usual objects of the issue of Treasury Bills are con-
version of loans, repayment of Treasury Bills and capital
expenditure. In issuing them every week Government enters
into competition with the joint-stock banks in attracting
funds and causing a temporary shortage in the money
market.

Current Rupee Loans. The current rupee loans of the
Government of India are of two kinds: (r) Non-terminable,
or those which are repayable only at the option of Govern-
ment after giving notice ; and (2) Terminable, or those which
Government has undertaken to repay either (a) on a certain
fixed date, or (b) not earlier than a certain fixed date and
not later than another fixed date. 1

Extent of Loan Operations. To gauge the extent of the
loan operations of the Government of India during the last

1 Government Securities Manual, 1921 (with latest correction slips),
p. 8.

136 THE MONETARY PROBLEMS OF INDIA

five years, the following three statements 1 furnish full
particulars :

The first statement relates to India's internal debt. It
will be seen that between 1928 and 1932 the internal obliga-
tions gradually increased by R. 139 crores, from R. 566-93
to R. 706-40 crores an increase of about 25 per cent, per
quinquennium. During the same period Treasury Bills in
the hands of the public rose from R. 8 to R. 48 crores, while
those in the Paper Currency Reserve fell from R. 32 to R. 6
crores in 1931 and then shot up to R. 50 crores in 1932. A
point of special interest is the gradual decline in the Provincial
Balances from R. 10-48 crores in 1927 to R. 3-82 crores in 1932.

The second table relates to India's external debt, which
is all in sterling. The sterling loans, except for a small
decline in 1932, rose at an increasingly rapid rate by nearly
R. 47 crores from R. 459-44 crores on the 3ist March, 1928,
to R. 506-12 crores on the 3ist March, 1932 an increase of
about 10-2 per cent, in the quinquennium.

Comparing India's internal with external debt it is clear
that the former is larger in magnitude than the latter, but
the excess on the 3tst March, 1932, was only R. 200 crores
out of a total combined debt of R. 12,13 crores. In
the official year ending 3ist March, 1932, however, India's
internal debt increased by 55 crores, while her external debt
decreased by 12 crores.

The third statement gives the interest-yielding assets
and shows the excess of interest-bearing obligations not
covered by the above assets. The latter has been increasing
since March 1929, but increased most during the year ending
3tst March, 1931, when it rose from R. 177-40 to R. 196-97
crores. It is of interest to note that the capital advanced
to Provinces and to Indian States shows a continuous though
not spectacular progress during the five years under review.

1 These are put together in the Report of the Controller of the Currency
for 1931-32, pp. 76-77, but are split here to facilitate study.

THE MONEY MARKET (C), 1926-32 137

Putting all the three statements together, on the
31 st March, 1932, out of a total debt of R. 1212*52 crores,
798-24 crores were productive in railways, telegraphs and
irrigation; 207-41 crores were unproductive; 41*91 crores on
account of cash, bullion and securities held on Treasury
account; and 164-96 crores were incurred on behalf of
Provincial Governments.

STATEMENT SHOWING THE INTEREST-BEARING OBLIGATIONS OF THE
GOVERNMENT OF INDIA INCURRED IN INDIA AT THE CLOSE OF EACH
FINANCIAL YEAR.' (A.)

(In Crores of Rupees.)

3ist March.

1928.

1929-

1930.

I93i.

1932.

In India :

Loans 2 ----- 372*25

390-73

405-11

417-24

422-70

Treasury Bills in the hands of the

|

public

7*59

4-00

36-04

55-38

47'54

Treasury Bills in the Paper Cur-

rency Reserve -

31-94

39-15

29-22

5-89

49-66

Ways and Means Advances -

9-50

Total Loans, etc. -

411-78

433-88

470-37

478-5I

529-40

Other obligations :

Post Office Savings Banks -

32-67

34*49

37- J 3

37-03

38-22

Cash Certificates -

30-70

32-30

35-oo

38-43

44*59

Provident Fund, etc. -

55-82

60-52

65-41

70*33

72-86

Depreciation and Reserve Funds

25*48

31-09

30-18

21-39

I7-5I

Provincial Balances 3 -

10-48

10-43

10-21

6-09

3-82

Total other obligations -

I55-I5

168-83

177-93

173-27

177-00

Total in India -

566-93

602-71

648-30

651-78

706-40

1 There are slight discrepancies in the figures given in the Reports of the
Controller of the Currency for 1930-31 (pp. 78-79) and 1931-32 (pp. 76-77).
Obvious print errors have been corrected.

- These figures represent the nominal amounts of loans outstanding
and also include small amounts of expired loans which do not bear interest.

3 The figures represent those of Provincial Balances which bear interest
either because they form part of the old Famine Insurance Fund or the
present Famine Relief Fund, or because they have been placed with the
Government of India on fixed deposit.

138 THE MONETARY PROBLEMS OF INDIA

STATEMENT SHOWING THE INTEREST-BEARING OBLIGATIONS OF THE
GOVERNMENT OF INDIA INCURRED IN ENGLAND AT THE CLOSE OF
EACH FINANCIAL YEAR. (B.)

(In Millions of Pounds.)

3ist March.

i

1928.

| 1929.

1930.

I93I-

1932.

i

In England :

I

Loans 1 -

272*32

! 283-31

289-03

316-81

3i3'34

War contributions

17-28

1 16-72

16-72

16-72

16*72

Capital value of liabili-

ties undergoing re-

demption by way of

terminable railway

annuities

54*79

; 53-35

51-86

50-32

48-72

India Bills

6-00

Imperial Bank of India

Loan -

!

4-05

Provident Fund, etc. -

19

'43

2-54

69

Si

Total in England

344-58

353-81

366-15

388-59

379-59

Equivalent at is. 6d.

to the rupee -

459-44

, 471-75

488-20

518-12

506-12

Total interest-bear-

ing obligations

1,026-37

1,074-46

i, 136-5

1,169-90

1,212-52

STATEMENT OF INTEREST- YIELDING ASSETS HELD AGAINST THE INTEREST-
BEARING OBLIGATIONS OF THE GOVERNMENT OF INDIA (vide STATE-
MENTS A AND B).

(In Crores of Rupees.)

3ist March.

1928. i 1929. I93- I IQ3 1 - J 93 2 -

Interest-yielding assets:
(i.) Capital advanced to railways
(ii.) Capital advanced to other
commercial departments -
(iii.) Capital advanced to Provinces
(iv.) Capital advanced to Indian
States and other interest-
bearing loans -

Total interest-yielding assets

Excess of interest-bearing obligations
not covered by the above assets -

668-60 700-69

20-73 21-81
126-34 I37-52

(
13-91 I5-49

730-79

22-70
I42-60

I7-65

743-98 752-33

23^5 i 25-48
I5I-82 I64-96

19-45 i 20-43

829-58

875-5I

913-74

938-90 963-20

I7 <-53

170-6I

177-40

196-97 207*41

1 These figures represent the nominal amounts of loans outstanding and
also include small amounts of expired loans which do not bear interest.

THE MONEY MARKET (C), 1926-32 139

Issue of Rupee and Sterling Loans. The rupee and sterling
loans issued during 1927-32 are detailed in two statements
below.

GOVERNMENT OF INDIA RUPEE LOANS, 1927-32 .*

Name.

Amount Out-
standing on
3istOct., 1931.

Date of
Issue.

Conditions of Repayment.
(Repayment will be at
Par.)

R.

1. 4 per cent.} 1 9

Loan, 1934-j
37

2. 4 1 per cent'

Loan, 1955-!

60 !

53,79,100 iiSth July,
| 1927, at
i R. 94-8

1,05,69,700 J7th Aug.,
! 1928, at
j R-94

3. 4^ per cent. 25,98,05,600
Bonds, 1934

4. 5 per cent.

28,22,85,800

Loan, 1939
44

5. 6 per cent. ! 2 9, 70, 80, 900
Bonds, 1933-

At R. 97-*

20 th June,
1929, at
R. 96-8

28th July,

36

6. 6J per cent. 1 6,
Treasury!
Bonds, 1935

95,16,600*

193.
par

at

I5th Sept.,
at

par

Repayable not before ist
Aug., 1934, an d not later
than ist Aug., 1937, on
3 months' notice

Repayable not before
I5th Sept., 1955, and
not later than i5th Sept.,
1960, after 3 months'
notice

8 Repayable not before
I5th Sept., 1934

Repayable not before
I5th July, 1939, nor
later than I5th July,

1944
Repayable not before

I5th Aug., 1933, nor

later than I5th Aug.,

1936
Repayable on I5th Sept.,

1935

* By cash R. 14,91,02,000.

It will be particularly noted that the terms offered in the
case of the 1931 rupee loan represent a rise of nearly -J per
cent, in the Government borrowing rate, but the ' general
market conditions when the loan was floated were by no
means favourable. Trade was depressed and a general want
of confidence prevailed. The stock market, particularly in
Bombay, was disorganised and dominated by political

The Investor's Indian Year Book, 1931-32, p. 5.

140 THE MONETARY PROBLEMS OF INDIA

GOVERNMENT OF INDIA STERLING LOANS,

Amount Out-
standing.

Interest
per Cent.

Date of
Issue.

Date of Redemption.

Interest
Payable
on

6,000,000 [ 6

Feb. 1930

On I5th June, 1932,

1 5th June

at par or at 101

and i 5th

per cent., on I5th

Dec.

June, 1933

7,000,000 6

May 1930

On 1 5th June, 1935,

1 5th June

at par or any inter-

and i 5th

est date after i5th

Dec.

June, 1933, at par

12,000,000 6

Oct. 1930

On i5th Oct., I937,|i5th April

at par or any inter- 1 and I5th

est date after I5th Oct.

Oct., 1935

17,181,249

5*

April 1931

On I5th July, 1938,

1 5th Jan.

at par or on any

and i 5th

i

interest date after

July

1 5th July, 1936

10,000,000

6

May 1931

On 1 5th Dec., 1934,

1 5th June

at par or at any

and i 5th

time after I5th

Dec.

Dec., 1933

(In all cases the buyer pays the accrued interest in addition to
the prices quoted in London.)

excitement. When the loan was announced it was freely
rumoured that an attempt would be made to boycott it,
and much propaganda was disseminated with that object.
In spite of these adverse factors the loan was on the whole
successful/ 2

Fall in the Prices of Securities. Recent years have been
marked by the general fall in the prices of Government
securities. The table on page 141 speaks for itself.

The conclusion from the quotations given is irresistible,
as many holders have painfully come to realise that even
Government securities are not immune from the effects of

1 The Investors Indian Year Book, 1931-32, p. 6.

2 Report of the Controller of the Currency for 1930-31, p. 25.

THE MONEY MARKET (C), 1926-32

141

REPRESENTATIVE RUPEE SECURITIES OF THE GOVERNMENT

OF INDIA. 1

3l % (Sub-

5 % *933

5 % 1945-55

4% 1960-62

ject to

(Free of

(Free of

(Subject to

I ncome-Tax) .

Income-Tax) .

Income-Tax).

Income-Tax) .

High-

Low-

High-

Low-

High-

Low-

High- Low-

est.

est.

est.

est.

est.

est.

est.

est.

1926-27

79A

74i

1054

I02|

noj

J 4lV

90 T V

86W

1927-28

79rV

74!

*03f

IO2

108^

io5H

90

87iV

1928-29

75S-

7i

I02{

ioo|

io6U

I02 T V

88J

83*

1929-30

73 nr

esA

101

99*

103!

IOO

84S

75J

1930-31

b8

6iiV

IOO^

Q8f

ioiA

99i

77^-

73

1931-32

63*

51

100*

95*

IOI-1J-

88|

75i

5i

world trade depression and uncertainty. Commenting on
the position of the 5 per cent, loan of 1929 Sir George Schuster
remarked : ' If it had not been for two unfortunate factors
over which we had no control, I am certain that last year's
loan would now be standing at a handsome premium. 2
These factors have been, first, the wave of dear money which
swept over the world, culminating in a 6| per cent, bank
rate in England . . . and, secondly . . . the fears in London
as to the future political stability of India/ 3

Government Assurance. All fears, however, in regard to
the repudiation of Indian sterling debt must be set at rest
by the recent Government assurances on the subject. The
Secretary of State for India stated on the 27th January,
1930, in answer to an inquiry as follows :

' India sterling securities, while issued under the authority
of Act of Parliament and charged on the revenues of India, are
not guaranteed by the British Government. Like many other
stocks, including stocks issued by a Dominion under the Colonial

1 Report of the Controller of the Currency for 1931-32, p. 78.
* It actually stood one point below its issue price.
3 Sir George Schuster's Budget speech, 1930-31.

142 THE MONETARY PROBLEMS OF INDIA

Acts, they are by law constituted stocks in which British trustees
are authorised to invest; but that is a separate question. The
Secretary of State cannot undertake to deal with hypothetical
contingencies ; but at the same time in view of the tenor of your
letter, I am directed by him to say that His Majesty's present
Government have no intention of allowing a state of things to
arise in India in which a repudiation of debt could become a
practical possibility, and that it is inconceivable to him that,
in dealing with any scheme of constitutional change in India,
Parliament could fail to provide safeguards, should they be
needed, against a breach of the conditions under which these
loans were issued. In view of the interest to the general public
of the questions which you have raised, this reply is being
published in the Press/ 1

Later the Prime Minister, in answer to a question in the
House of Commons on the 26th June, 1931, said:

' The financial strain on the resources of the Government of
India, already great owing to the world economic depression,
has been accentuated by uncertain ties which have attended the
discussion of constitutional changes and more particularly the
consideration of the provisions to be embodied in the new Con-
stitution to ensure financial stability. It will not be possible
to introduce the proposed constitutional changes, if financial
stability is not assured, and His Majesty's Government are
determined not to allow a state of affairs to arise which might
jeopardise the financial stability and good government of India
for which the Secretary of State is at present responsible. They
have therefore decided that, should the need arise, they will apply
for the authority necessary to enable them to give financial
support under suitable conditions to the Government of India
for the purpose of maintaining the credit of the country pending
the settlement of the constitutional problem and the formulation
of provisions which will ensure the maintenance of India's credit
in the future/ 2

Loan Operations of Public Bodies. We have been so far
dealing with Government loan operations. An idea of the

1 The Stock Exchange Official Intelligence, 1932, p. cxlvi.

2 Ibid., pp. cxlvi-cxlvii.

THE MONEY MARKET (C), 1926-82 143

loan operations of leading public bodies like municipalities,
corporations and trusts may be obtained from the following
table i 1

Amount of Loans

, T , ._ , Outstanding as on the

Name of Local Body . 3Qth Sep ^ IQ3I .

R.

Calcutta Corporation - 8,36,44,767

Calcutta Port Trust - 22,04,24,200

Calcutta Improvement Trust - - 2,31,00,000
Bombay Municipality - 17,69,55,368

Bombay Port Trust - - - 13,61,89,556

Bombay Improvement Trust - - 16,53,94,680
Madras Corporation - 88,11,000

Madras Port Trust - - - i,59,n,357

Karachi Municipality - - - 83,56,000

Karachi Port Trust - - - 4,19,65,000
Rangoon Corporation - 3,37,67,500

Rangoon Port Trust - 4,80,28,680

3. THE STOCK EXCHANGE.

The preceding discussion of loan operations naturally
leads to that of the Stock Exchange. Stock brokers are not
available everywhere in India, and stock exchanges do not
exist even in all big commercial centres. There are only
two stock exchanges, situated in Bombay and Calcutta, the
stock exchange in Madras being defunct.

The Bombay Stock Exchange. The Bombay Stock Ex-
change, known as the Native Share and Stock Brokers'
Association, is the oldest in the country; its formal con-
stitution dates from the 3rd December, 1887, although it
existed much earlier. It is housed in Sir Dinshaw Petit
Brokers 1 Exchange Hall, which was bought by the Native
Share and Stock Brokers' Association from its funds in
1899. In November 1917 a second Stock Exchange, called
the Bombay Stock Exchange, was started, but it proved
still-born.

1 Compiled from tables in the Investor's Indian Year Book, 1931-32
(pp. 7-14). Figures of sterling debt have been converted into rupees at
is. 6d. per rupee.

144 THE MONETARY PROBLEMS OF INDIA

Inquiry Committee, 1923. After the termination of the
War the boom in the market was characterised by a flota-
tion of many new companies and heavy speculation in shares
in Bombay during the years 1919-22 which were bound to
result when the crash came, as it soon did, in heavy losses
and great discontent. There was' much criticism of the
stock exchange operations in Bombay, and public confidence
in the Native Share and Stock Brokers' Association was
greatly shaken. On the I4th September, 1923, the Govern-
ment of Bombay appointed a Committee ' to inquire into
the constitution, government, customs, practices, rules,
regulations, and methods of business of the Native Share
and Stock Brokers' Association of Bombay, and to investigate
any such complaints of the public and to make any such
inquiries with reference to any of the aforesaid matters or
any other matter appertaining to the aforesaid Association
as the Committee may deem proper, and thereafter with a
Hew to protecting the investing public against the in-
terested or irregular control of business to formulate such
definite proposals for the future constitution, control,
direction and regulation of the aforesaid Association as
the Committee may deem proper/ The Committee con-
sisted of seven members, including Sir Wilfrid Atlay as
Chairman.

The report of the Atlay Committee was published early
in 1924 along with the Minority Report of one member,
Mr. B. J. Desai. The Majority Report made a number of
recommendations regarding the strengthening of discipline,
extension of business hours, curtailment of holidays, annual
election of the Board, annual declaration by members as to
the class of business they propose to undertake, abolition of
sub-brokers, use of a common form of transfer, abolition of
blank transfers on the reduction of the stamp duty, etc.
The Minority Report laid particular stress on the reduction
of holidays, and made certain suggestions of a minor nature.

THE MONEY MARKET (C), 1926-32 145

The Association accepted the Minority Report, which left
the position much the same as before.

Heavy speculation in certain mill scrips led to a crisis
and a good deal of agitation again in 1925 for a thorough
reform of the rules of the Association. The result was new
draft rules ensuring against wild speculation and recurrence
of such crises.

Membership. The membership of the Association is
open to all Indians and to any British subject who himself
or whose father has resided in the Bombay Presidency for
ten years prior to his application for the said membership. 1
The number of share and stock brokers at present (1931) is
446.

To ensure a high level of business integrity the admission
requirements are very strict. Great care is taken to see that
a prospective member has done nothing in the past to com-
promise his credit. Men of substance with landed property
are naturally preferred. On receipt of an application
objections are freely invited, which are treated as con-
fidential. Every application must be supported by at least
two-thirds of the members before it can at all be considered.
The election of a member is by ballot, and if any application
is rejected, without assigning any reason, it is not enter-
tained again for a period of two years. The entrance fee
is fixed at R. 30,000, and is known as the value of a member-
ship card. The number of such cards is limited by a
resolution of the general body, who may refuse admission.

Members' Conduct. Stringent rules and machinery exist
in regard to the conduct of members and for dealing with
cases of default, fraud, and manipulation. As regards
default, there is a ' Committee of Defaulters/ consisting of

1 Cf. A foreigner is not admitted as a member of the London Stock
Exchange until he has resided within the British Dominions for ten years
and naturalised himself within such Dominions for a period of five years
nei't preceding the date of his application. (Vide Rule 21 (3) of the
London Stock Exchange Rules.)

10

146 THE MONETARY PROBLEMS OF INDIA

six members, to adjudge cases. The numbers of defaulters
during 1921-30 were as follows:

LIST OF DEFAULTERS.

1921 ------ 15

1922 ------ ii

1923 ------ 3

1924 ------ 8

1925 ------ 5

1926 ------ i

1927 ------ 3

1928 ------ i

1929 ----- > 5

1930 ------ 3

The moment a member is declared a defaulter he has to
surrender all his account books, papers, etc., to the com-
mittee. He has also to furnish his balance sheet and a list
of the business dealings which remain to be cleared.

The rules regarding business fraud definitely provide that
there should first of all be actual delivery in all trans-
actions, fictitious orders being prohibited, on pain of a
heavy penalty. To safeguard the interest of an average
investor, it is laid down that all orders, big or small, must
be accepted, and there should be no ' bucket shop ' dealings
or trading in differences of quotations. A broker may do
any business on his own account, but never indulge in an
improper use of a customer's securities. To detect any
fraud, the accounts are open to inspection and scrutiny
of the Board of Directors. A routine is prescribed and
there is complete uniformity in the maintenance of regis-
ters. A very regular strict day-to-day account has to be
kept of a broker's purchases and sales.

There is an Arbitration Committee consisting of sixteen
members of the Exchange, which is empowered to take up
cases of fraud and to expel any member found guilty under
the rules. A member once expelled cannot be reinstated
unless the offence is one of omission, not fraud. It is to

THE MONEY MARKET (C), 1926-32 147

the credit of the Bombay Exchange that there are no acts
which can be termed as ' detrimental to the interests and
welfare of the Exchange/ By common consent and long
usage the business moral tone maintained is sufficiently
high.

Kinds of Members. Unlike the London Stock Exchange,
the Bombay Stock Exchange has no separate jobbers and
brokers. Its members are all brokers. Before 1927 there
was no restriction in the nature of the business that a broker
could do. Buf now all members must be brokers without any
subsidiary business interests in any other association. On
the whole, about one-fourth of the active members are com-
mission agents also.

Methods of Business. Every broker on the Bombay Share
Bazar is entitled to four authorised clerks, and with their
assistance he carries on his dealings on the Exchange.
Every member or his clerk must possess a memorandum
book, in which transactions are entered on the spot in
pencil. This forms the foundation of all future entries or
book-keeping. In his office a broker maintains a souda
book which is posted in ink at the close of every day. It is
the journal recording all transactions in a chronological
order from day to day. The journals are of two kinds
one for the broker and the other for the clients. The former
is the record of all the transactions with brokers only, the
latter shows the dealings entered into on behalf of the clients
in the Bazar, in their names. The broker's book is known
as the contract book, and it forms the basic document in
cases of dispute. It is, therefore, in very elaborate form,
its columns being devised with a view to eliminating all
possible misquotations and misunderstanding. As regards
the client's book, the only difference is that it is not so
detailed as the contract book. For instance, it has no
signature column, because most of the clients are not on
the spot, and the register cannot be sent to every one from

148 THE MONETARY PROBLEMS OF INDIA

day to day. Again, as the orders of a client are conveyed
by correspondence, the precaution to write in words also
is dropped; the amount is written in so many places that
manipulation is practically impossible.

Kinds of Clients. The broker's clients are of various kinds.
First there are the pure and simple investors who set aside
a part of their income and purchase shares whenever con-
venient with the sole aim of getting an income. They
believe in the ' rainy day ' theory and have no intention of
selling their interest in the ordinary course of things.
Secondly, there are moneyed men who invest their money
in financing needy brokers for short periods of usually one
month at high rates. Thirdly, there are keen business
experts with funds at their disposal, who invest and reinvest
and follow the bears of the market. They are speculators
behind the brokers, waiting for the market to touch the
bottom, when with all their resources cornered they lift
the prices through the roof.

Clearing House. The Bombay Share Bazar has no Clear-
ing House of its own. The Bank of India performs the
functions of a Clearing House for the Association, which pays
to the bank R. 55,000 annually. This amount is raised
by members of the Clearing House subscribing R. 10 per
month, and levying i pice per cent, on market rates both
for payment and delivery. A charge equivalent to R. 5
per R. 1,000 is also made by the Bank of India for buying
in and selling out deficiencies. The bank obviously makes
no direct profit, but is benefited indirectly by a large clientele
for its regular banking business. 1

Bombay Stock Exchange Holidays. The Bombay Stock
Exchange is closed for about 100 days in the year. For
instance, in 1932, besides Sundays, there were forty-four

1 Much of the preceding information on the working of the Bombay
Stock Exchange is taken from the thesis on Methods and Machinery of
Investments in India, by Mr. S. A. Haque, M.A., University of Bombay,
by the courtesy of Professor C. N. Vakil.

THE MONEY MARKET (C), 1926-32 149

holidays viz., January i; February 9; March 5, 21, 22, 23,
25, 26, 28; April 15, 17, 18, 20; May 13, 17; June 14; July
14, 16, 17; August 8, 15, 24; September i, 4, 5, 6, 7, 12, 13,
25; October 9, 27, 28, 29, 30; November 13; and December
24 to 31 (both days inclusive).

Stock Exchange Operations, 1927-32. Having seen some-
thing of the mechanism of the Bombay Stock Exchange, a
brief notice of its operations during the last five years may be
taken. The year 1927 was one of general improvement, but
the textile industry experienced a severe depression. Some
mills were liquidated and others ceased to work a matter
of grave concern to Bombay in general and the Stock Ex-
change in particular, for their prosperity is closely bound up
with the conditions in the local textile mills. The industrial
market in general, however, showed greater activity than
for some years past. A point of special interest to note is
that in 1927 Exchange operations began for the first time
to be conducted in conformity with the new rules approved
and sanctioned by Government. In 1928 the trade de-
pression spread from textile to other industries, and from
1929 onwards there occurred an unprecedented slump in the
Indian securities market.

' On the loth day of July, 1930, there was a heavy pressure of
selling and the buying power seemed almost absent. Prices of
many securities fell rapidly and falling prices created great con-
sternation among investors and speculators. Business was there-
fore suspended by our exchange for three months from 11.7.1930
to 10.10.1930, since in panics securities are worth only what one
can actually sell them for. The suspension of business led to
numerous unfounded complaints; and information of a most
unreliable character, published in a section of the press by
designing parties , created needless nervousness . It is satisfactory,
however, to record that the decision and action we took were
approved in the commercial and financial circles, and even by
the Government, who were ready to sanction further suspension,

150 THE MONETARY PROBLEMS OF INDIA

if needed. Be it recorded to the credit of our exchange that
there was hardly any failure worth mentioning during these
troubled and depressed times/ 1

The unfortunate conditions of the Bombay Exchange
may be compared with those of New York. The following
observations of the President of the New York Stock Ex-
change contained in his address dated the I5th December,
1931, are significant:

' The unwillingness on the part of the public to buy securities
has been the real trouble with our market and the cause of
declining prices. That there were no willing buyers is easily
explained by prevailing business conditions. I do not doubt
that many of you have said to yourselves in recent times that
such and such a stock looked cheap or that it was selling at an
absurd price and yet you hesitated to buy. This was because
you were not sure that the worst was over and you still expected
that the next day might bring forth bad news. Confidence is
bound to return and, when it does, prices will rise. I feel that
the basic causes of the depression have been intelligently studied
and that in all quarters of the world responsible people have
been working towards constructive ends. I have no doubt of their
ultimate success, and have supreme confidence in the future of our
own country and its great business and industrial organisation/

Government Securities. Turning to the Government
securities market, it has been specially marked by unpre-
cedented dullness in recent years. For days together the
brokers were unable to effect sales of Government securities,
and we have it on the authority of the President of the Native
Share and Stock Brokers' Association that '3^ per cent,
paper, 4 per cent, loan of 1960-70, and 5 per cent, of
1945-55 were absolutely unsaleable now and then even at
rates lower than the nominal rates quoted on the exchange/

This state of affairs was obviously the result of increasingly
high rates at which State loans were floated, the maintenance

1 Extract from the Annual Address of the President, Native Share and
Stock Brokers' Association, Bombay, loth July, 1931.

THE MONEY MARKET (C), 1926-32 151

of a high bank rate, the policy of the Government in restrict-
ing open market operations in Government securities, and
the nervousness and uncertainty engendered by political
agitation. These causes were themselves due to other
causes, which cannot be explained here. The position has
latterly shown distinct improvement, and at the end of 1932
securities in general, and Government securities in particular,
stood clearly at a higher level than in the beginning of the year.

The Calcutta Stock Exchange. At first the Calcutta share
market depended for its regulation on the market custom.
The Calcutta Stock Exchange was formed in 1908. Rules
and regulations formed Were gradually modified in the light
of experience. The Calcutta Stock Exchange Association,
Ltd., which took over the unincorporated Association bearing
the same name, is only ten years old. It was registered
under the Indian Companies Act VII. of 1913 on the 7th June,
1923. The main object of the Association is ' to facilitate
the transaction of business on the Stock Exchange and to
make rules and byelaws regulating the mode and conditions
in and subject to which the business on the Stock Exchange
shall be transacted and the conduct of the persons transacting
the same and generally for the good order and government
of members of the Association/

The new building which the Calcutta Stock Exchange
now occupies is one of the finest; it was opened on the
6th July, 1928. The rooms of the Association are open
only to members, and such partners and assistants as are
duly admitted, from 10.30 a.m. to 5.30 p.m. daily, except
on such days as the Committee of the Association may
declare to be Stock Exchange holidays.

The Association has an authorised capital of R. 3,00,000
divided into 300 ordinary shares of R. 100 each fully paid up;
no member is entitled to hold more than one share. The
subscribed capital, according to the latest balance sheet
(30th .September, 1932) , is R. 2,22,000, accounting for 222

152 THE MONETARY PROBLEMS OF INDIA

shares, of Which 20 are forfeited. On the ist October, 1930,
the Association had 214 members (214 firms with 5*2 repre-
sentatives); on the 3oth September, 1931, the number of
members fell to 204 with a personnel of 505 ; while on the
30th September, 1932, the number was 202 with a personnel
of 502. The reduction was due to ten firms having ceased
to be members of the Association during 1930-31 and four
in 1931-32, but two new firms became members in the latter
year. Further, the year 1930-31 has been unfavourable for
both the Indian Stock Exchanges, inasmuch as it witnessed
a heavy fall in the price of Government securities. The loss
on the revaluation of the Calcutta Stock Exchange Associa-
tion's investments amounted to R. 42,701-10-0. 1

The year 1931-32, however, showed a considerable rise
in the price of Government securities, and on revalua-
tion of the Association's investments there was a profit of
R. 79,020-13-0. The Association in its tenth annual general
meeting held on the 2ist December, 1932, resolved to dis-
tribute a bonus of R. 250 per share for the year ended
3oth September, 1932 (as compared with R. 100 in the pre-
ceding year) to registered shareholders as on the i3th
December, 1932. The bonus is payable on or after 6th
January, I933. 2

The Committee of the Calcutta Stock Exchange has, by
a rule, an equal proportion of Europeans, Marwaris and
Bengalis. Like the Stock Exchange in Bombay, members
of the Calcutta Stock Exchange are subject to by-laws of
the Association as well as to customs and usages which have
often the force of rules. As for their business, an idea may
be had from the following description :

' The market customs differ from those of most other stock
exchanges, since there are no settlement days, delivery is due

1 The 'Calcutta Stock Exchange Association, Ltd., Report and Accounts
for the year ended 3oth September, 1931, p. 2.

2 Ibid., 3oth September, 1932, pp. i and 2.

THE MONEY MARKET (C), 1926-32 153

the second day after the contract is passed, and sales of securities
are effected for most part under blank transfers. It has not got
jobbers like the London Stock Exchange, but the brokers mostly
combine the function of dealers. The principal business trans-
acted is connected with the shares in Jute Mills, Coal Companies,
Tea Companies registered in India, miscellaneous industrial
concerns (such as paper, flour, etc.), Railway Companies and
Debentures, the latter representing those of industrial concerns
and Trustees Investment Securities, namely Municipal, Port
Trust, and Improvement Trust Debentures.

' A general meeting of the shareholders annually elects a Com-
mittee, which elects several Sub-Committees and Honorary
Office Bearers the President, two Joint Honorary Treasurers
and the Honorary Secretary. The Committee is empowered to do
all work on behalf of the Association, which in its turn delegates
powers to the Sub-Committees and the Honorary Office Bearers.
The Committee also adjudicates in disputes between members,
thus enabling the members to avoid Law Courts in most
cases/ 1

The Madras Stock Exchange is at present defunct. All the
information available can be summarised in a few lines.
It was originally opened on the 6th April, 1920. It had about
100 members, but of them only 25 were working members.
The card for admission as a member cost R. 1,000; besides,
there was an annual subscription of R. 100. Each working
member had to deposit a security of R. 3,000. The business
of the Madras Stock Exchange consisted chiefly in dealings
in mill shares. But the business was never much and the
number of working members gradually fell to three or four.
The Stock Exchange was therefore closed, and there does
not appear to be much chance of its being revived in the near
future.

The fact is that there is little speculation going on in
Madras. The principal line of business is investment, which
is at present conducted by three firms viz., Messrs. Huson

1 The Indian Year Book, 1932, p. 713.

154 THE MONETARY PROBLEMS OF INDIA

Tod and Co., Messrs. James Maconochie and Co., and Messrs.
Stephen and Co. Those who want to buy or sell shares
go to them, and they are doing fairly good business. They
also do underwriting work. 1

1 Information kindly supplied by Dr. P. J. Thomas, University Professor
of Economics, Madras.

CHAPTER VI
THE BANKING INQUIRY, 1929-31

i. ORIGIN, CONSTITUTION AND SCOPE OF THE INQUIRY.

IT was as early as the nineties of the nineteenth century,
if not earlier, that the need of a banking inquiry found
expression in the proceedings of the first Indian Industrial
Conference. Just before the War, the Royal Commission
on Indian Finance and Currency of 1914 had urged the ap-
pointment of a committee to study certain questions con-
nected with banking, while in 1918 the Industrial Com-
mission made the following significant recommendation :

' We ask, therefore, for the appointment at the earliest possible
date of an expert committee to consider what additional banking
facilities are necessary for the initial and for the current finance
of industries; what form of Government assistance or control
will be required to insure their extension on sound lines as widely
as possible throughout the country; and whether they should be
of provincial or of imperial scope, or whether both these forms
might not be combined in a group of institutions working
together/

After the War, in 1919, a resolution urging the appoint-
ment of a banking committee was moved in the old Imperial
Legislative Council by the Hon. Mr. (now Sir) B. N. Sarma.
In 1924 the External Capital Committee emphasised the
importance of a co-ordinated survey being undertaken at
the earliest opportunity of the whole field of banking in
India. 1 The recommendation of the External Capital
Committee was supported by the Royal Commission on

1 Report of the External Capital Committee, 192$, p. 15.

156 THE MONETARY PROBLEMS OF INDIA

Indian Currency of 1925-26, and led to important consulta-
tions and correspondence between the Government of
India on the one hand and the Provincial Governments and
the Managing Governors of the Imperial Bank of India on
the other. 1

In 1927 the demand for a banking inquiry was reiterated
by Mr. S. N. Haji in the Indian Legislative Assembly, and
the resolution Was endorsed by the fifth Indian Industrial
and Commercial Congress and also by the All-India Economic
Conference in their annual sessions. Government itself was
agreeable to the institution of a banking inquiry, but preferred
to wait until the Reserve Bank was established and some ex-
perience of its working had been gained, and until the Report
of the Royal Commission on Indian Agriculture, expected to
deal with the problems of rural banking, was received.

In 1928 the Report of the Royal Commission on Indian
Agriculture was published, while the Reserve Bank Bill
had Jailed. In the meantime the need of a banking inquiry
Was again urged by resolutions passed by the Associated
Chambers of Commerce of India and Ceylon and the Federa-
tion of Indian Chambers of Commerce and Industry in
December 1927 and 1928 respectively

Constitution. After consultation with commercial bodies,
the Central Legislature and Provincial Governments, the
Government of India decided to hold, in 1929, a compre-
hensive Banking Inquiry in three stages. In the first stage,
a number of Provincial Committees with persons possessing
intimate knowledge of local conditions were appointed
to deal with the following subjects, viz. agricultural credit
(including co-operative credit), credit facilities for small
industries, mortgage banks, the financing of internal trade,
and the stimulation of habits of investment and attraction
of banking deposits. In the second stage, an All-India

1 Full correspondence is published in the Indian Legislative Assembly
Debates, Official Report, 31 January, 1927, vol. i., pp. 223-276.

THE BANKING INQUIRY, 1929-31 157

Committee co-ordinated the material collected by all the
Provincial Committees and completed the picture by itself
making investigations into certain fields of banking which
had been excluded from the purview of the Provincial Com-
mittees, such as regulation of banking, banking education,
and credit facilities for India's main industries such as.
cotton, jute and coal. On the completion of the survey
of the whole field of banking by the Central Committee, it
was assisted in coming to its conclusions by a small body of
foreign experts, selected by Government and having experi-
ence of rural credit and industrial banking. This was the
third and the last stage of the inquiry. 1

Thus the recent Banking Inquiry has been both in its
constitution and scope the first of its kind ever set up in
India. It was Sir Basil P. Blackett, one of the greatest
Finance Members that India has had, who first conceived of
it, but the credit of its successful inauguration goes to Sir
George Schuster. Besides the Indian Central Banking
Inquiry Committee there were ten Provincial Committees
set up in the various provinces, 2 and nineteen of the Indian
States 3 formed committees simultaneously for their re-
spective territories. This is the first time in the field of
finance that a Central Committee has been assisted by Pro-
vincial Committees in all provinces, and that committees
in British India have had their counterparts in a large
proportion, if not the whole, of the Indian States. Towards
the end of their labours, the Central Committee had the
benefit of consultation and collaboration with six foreign
experts 4 chosen from Great Britain and other countries.

1 Report of the Indian Central Banking Inquiry Committee, 1931, p. 3.

2 Assam, Bengal, Behar and Orissa, Bombay, Burma, Central Provinces,
Madras, Punjab, United Provinces and Central Areas.

3 Akalkote, Aundh, Baroda, Bhopal, Bikaner, Dhar, Dholpur, Gwalior,
Hyderabad, Jodhpur, Kolhapur, Orcha, Patiala, Phaltan, Porbandar, Pudu-
kottah, Ratlam, Savanur and Travancore. Of these Jodhpur, Pudukottah
and Dholpur Durbars did not prepare any reports of their inquiry.

* They were : (i) Mr. G. C. Cassels, Manager of the Bank of Montreal,
London; (2) Mr, B. Currie, Partner in Glyn, Mills and Company; (3) Dr.

158 THE MONETARY PROBLEMS OF INDIA

The Central Committee consisted of Sir Bhupendra Nath
Mitra, K.C.S.L, K.C.I.E., C.B.E., Chairman; Sir Purshotam-
das Thakurdas, Kt., C.I.E., M.B.E., M.L.A., Vice-Chairman;
and nineteen other members, of whom fifteen were Indians.
The members included two nominees each of the Indian
Chambers of Commerce and Industry and of the Associated
Chambers of Commerce, two Indian economists, two repre-
sentatives each of the co-operative movement and of indig-
enous bankers, one representative each of the joint-stock
banks, exchange banks, and the Imperial Bank of India,
and six representatives of the general interests of the public
requiring credit facilities.

Scope of the Inquiry. As already observed, the Central
and Provincial Committees between them covered the whole
field of credit in India. The terms of reference to the
Indian Central Committee were :

' (a) The Development of Banking with a view to the expan-
sion of indigenous, co-operative and joint-stock banking with
special reference to the needs of agriculture, commerce and
industry.

(b) The Regulation of Banking with a view to protecting the
interests of the public; and

(c) Banking Education with a view to the provision of Indian
personnel in adequate numbers and with the necessary quali-
fications to meet the increasing needs of the country for a sound
and well-managed national system of banking/

The Indian Central Committee issued its report in Sep-
tember 1931 in two parts a Majority Report of 915 pages
including the experts' report, and a Minority Report of

A. Friederich, General Secretary of the Union Co-operative Society,
Darmstadt; (4) Dr. O. Jeidels, a Managing Partner of the Berliner Handels-
Gesellschaft, Berlin, Member of the Board of the German National
Railway Company and Director of various other companies in Germany ;

(5) Mr. A. P. McDougall, C.B.E., Chairman and Managing Director of
Midland Marts, Ltd., and Chairman of the Midland Wool Groupes, Ltd.,
formerly President, Co-operative Farms Trading Society in Scotland;

(6) Dr. L. J. A. Trip, former Treasurer General at Department of Finance,
the Hague, and former President to Bank of Java.

THE BANKING INQUIRY, 1929-31 159

484 pages signed by a single member, Mr. Manu Subedar.
Some idea of the gigantic character of the material collected
may be obtained from the fact that the ten volumes of pro-
vincial reports cover about 3,500 pages, while the entire
evidence both provincial and central runs to well over
17,000 pages in close and often small print,

2. NATURE OF THE PROBLEMS.

General Observations. Considering the terms of reference,
the problems which the Banking Inquiry Committee has
tackled are of a very wide character. They embrace, in
one way or another, all the economic institutions and all
the economic operations in the country. The importance of
such an investigation can hardly be exaggerated. Accord-
ing to Sir Purshotamdas Thakurdas, ' the problems under
inquiry affect vitally not only the prosperity of the masses
but even their very existence under the present conditions/ 1

The problem of rural credit is by far the most important
of all economic problems in India. But the problem is not
so simple as it may look at first sight. Thanks to the work
of the Royal Commission on Agriculture in India, it is
now clearly recognised that no machinery of rural credit,
however perfect, will yield satisfactory results unless, at
the same time, it is accompanied by all-round efforts to
make agriculture a paying industry. In this respect the
findings of the Agiicultural Tribunal of Investigation in
England are of considerable interest and instruction for
India. It would be perhaps as well to enumerate here
briefly some of the important factors which the Agricultural
Tribunal mention as of sufficient importance for the well-
being of agriculture in any country. They are: (i) The
removal of the existing impediments to efficient production,
e.g. fragmentation and subdivision of holdings in India;

1 Foreword to Indian Finance, Banking Inquiry Number, 1930, p. 2.

i6o THE MONETARY PROBLEMS OF INDIA

(2) the fiscal organisation of the country and, in particular,
assistance to agriculture by tariffs and subsidies; (3) the
lowering of the burdens of taxation; (4) the economic
organisation of the industry, and in particular the develop-
ment among farmers of methods of purchase and sale and
of co-operative insurance; (5) the institution of schemes
for the improvement of land, livestock and crops, the
elimination and control of pests of plants and animals, the
provision of power and other assistance to industries sub-
sidiary to agriculture, and the development of afforestation ;
(6) the organisation of the transport system of the country
with due regard to the interests of agriculture ; and (7) the
development of State or voluntary organisation to provide
the necessary central and local machinery for carrying out
measures of agricultural policy and for influencing that
policy. 1

Rural Indebtedness. The improvement of agriculture is
closely bound up with the problem of rural indebtedness.
Accurate estimates of rural indebtedness are not available,
but on the authority of the Indian Central Banking Com-
mittee, R. 900 crores may be taken as a very rough estimate
of the total rural indebtedness of India, 2 and the general
consensus of opinion is that the volume of indebtedness has
been increasing. The causes responsible for this indebted-
ness may be said to be, in the main, past indebtedness,
high rates of interest, the small size of holdings, recurring
losses of cattle from drought and disease, insecurity of
crops, and to a certain extent extravagant expenditure on
social ceremonies.

The evils to which rural indebtedness gives rise are many,
but some of them are often exaggerated. For instance,

1 Report of the Indian Central Banking Inquiry Committee, 1931, pp. 49-52.

2 Indian Banking Committee Report, 1931, p. 55. The shares of the
various provinces arranged in order of magnitude are, Bchar and Orissa
155, Madras 150, Punjab 135, United Provinces 124, Bengal 100, Bombay
8 1, Burma 50-60, Central Provinces 36, Assam 22 and Central Areas 18
crores of rupees.

THE BANKING INQUIRY, 1929-31 161

it is said that rural indebtedness causes the transfer of land
from the agricultural class to the non-agricultural money-
lender with consequential loss of agricultural efficiency.
This is reported to be true of Behar and Orissa, Bombay
and particularly of Bengal, but not of the United Provinces,
Madras, the Punjab and the Central Provinces. 1 Again,
the allegation is generally made that the cultivator is
obliged, by reason of his indebtedness, to sell his produce
to his creditor at an unfavourable price. According to the
Banking Committee, the complaint is more applicable to
Madras, Bengal and Assam than to other provinces. In-
stances of economic servitude arising from the moneylender's
grip over the cultivator are mentioned by the Royal Agri-
cultural Commission in their report (paragraph 363). Fortu-
nately they are now reported to be rare. 2 But the existing
unsatisfactory system of agricultural finance in which no
distinction between short and long period loans is made
may be attributed to the cultivator's chronic borrowing. 3

Moneylenders. Turning to the existing credit agencies
the moneylenders present a twofold problem. On the
one hand their interest charges are high and in the case of
some moneylenders their practices are questionable. On
the other hand their decline has started. This is unfortunate,
inasmuch as they are still an indispensable feature of Indian
rural economy. 4 They are a repository of local knowledge
and experience and their business relations often go back
for centuries. Such a class must not be allowed to die out ;
it should be, where necessary, reformed and rejuvenated.

Indigenous Bankers. The preceding words apply with even
greater force to the indigenous bankers, whose charges for
the services they render generally ' do not compare un-
favourably with those of joint-stock banks and whose
beneficent sphere of influence is wider than theirs/ 5 But

1 Indian Banking Committee Report, 1931, p. 59.

2 Ibid., p. 60. n Ibid.

4 Ibid., p. 83. 6 Ibid., p. 106.

ir

162 THE MONETARY PROBLEMS OF INDIA

as explained above (p. 64), owing to a variety of reasons,
they have fallen on evil days. To sum up in a sentence,
the problem is how best they can be reorganised so as to
be linked up with the general banking system.

Co-operation. The problem of co-operative finance is so
large that space will permit but a bare catalogue of the
main defects which require to be remedied. They aie:
(i) Highly excessive overdues, (2) defective audit, (3) in-
efficient control, (4) lack of understanding of the principles
and of the knowledge of rural credit, (5) want or inadequacy
of suitably trained staff and workers, (6) reluctance to take
action against defaulters and to liquidate societies which
are beyond remedy, (7) inelasticity, dilatoriness and in-
adequacy of co-operative finance, (8) dearness of co-operative
finance, (9) restriction of the movement largely to credit
and the neglect of other important spheres such as market-
ing to the indirect and ultimate injury of co-operative
finance, and (10) insufficient connexion with the commercial
banking system of the country. Besides these there are
some defects peculiar to particular provinces 1 and which
are enumerated below:

Assam.

(1) Frequency of benami 2 loans and defalcations of societies.

(2) Inadequacy of fluid resources.

(3) Practice of allowing credit instead of strictly cash sales

in co-operative stores.

(4) Unwise extension of loans.

1 Indian Banking Committee Report, 1931, pp. 139-40. A slight modi-
fication in the analysis is attempted in the interest of space and clearness,
but no real departure from the original has been made.

z Benami loans appear to have been quite common even in the nineteenth
century. They are described in the Capital of the a6th July, 1892, as follows .
' A, being, we will suppose, in difficulties, and wishing to defraud his
creditors, makes an arrangement with B, under which he gives him a
mortgage over his entire stock-in-trade, B either giving A in return a
nominal sum for the whole property or making a fictitious entry in his books
that he has given so many rupees to A, in consideration of which he has
been granted the mortgage. When the time comes for A to inform his
creditors that he is insolvent, the creditors either find B in possession,
or that the bulk of the stock has been removed to B's premises. All appears

THE BANKING INQUIRY, 1929-31 163

Bengal.

(i) Tendency to make central banks too small.
Behar and Orissa.

(1) Preponderance of middle-class urban element in the

direction of policy.

(2) Mixing up of short and long term finance in the central

banks.
Bombay.

(1) Lack of careful selection of members.

(2) Lack of clear distinction between short, intermediate and

long term loans.
Central Areas.

(1) Dishonest members and excessive loans.

(2) Lavish borrowing by Committee members.

(3) Inadequacy of co-operative staff and absence of honorary

workers.
United Provinces.

(1) Inaccuracy of accounts.

(2) Inclusion of zamindars and moneylenders in the societies,

disturbing the feeling of equality of status.

(3) Absence of a provincial bank.

Attention may now be turned to the problem of the long
term credit as required by the Indian agriculturist. It is
admitted that the solution lies largely in the establishment
of more Land Mortgage Banks, but the question arises as
to what type suits India best. The main questions affecting
the working of the co-operative Land Mortgage Banks in
India have been summarised by the Banking Committee
as follows :

(i) What should be the economic purposes for which long
term land mortgage credit might beneficially be supplied to
agriculturists ?

to be in order, for there is the mortgage deed, to the correctness of which
all concerned in the swindle are prepared to swear. The creditors, finding
nothing to be got by legal proceedings, but additional expenditure, do not
prosecute, and in process of time the two swindlers divide the spoil in
such manner as they have arranged. It sometimes happens, however,
that the thieves fallout and Bis unwilling to disgorge to A the share of the
plunder to which the latter considers himself entitled.'

164 THE MONETARY PROBLEMS OF INDIA

(2) What should be the maximum period for repayment and
the mode of repayment ?

(3) Whence should mortgage banks derive their working
capital? Should share capital be insisted on, and if so, what
proportion should it bear to the borrowings ? Where the issue
of land mortgage debentures for raising the bulk of the working
capital is favoured, should the issue be by the primary land
mortgage banks or by a central agency ? If it is to be a central
agency, should it be the existing Provincial Co-operative Bank
or a separate central land mortgage bank, which should finance
only the primary land mortgage banks ?

(4) Should land mortgage banks be permitted to receive
deposits like co-operative central banks or joint-stock banks,
and if so, for what purpose and under what safeguards ?

(5) What should be the relation between the land mortgage
banks and the ordinary credit society where they co-exist ?

(6) Should the Government give any financial assistance to
these banks, and if so, what form should it take ? Direct loans,
exemption from certain taxes and fees guaranteeing principal or
interest of debentures and making them trustee securities, and
purchase of a portion of debentures are suggested.

(7) Should these banks be invested by special legislation with
summary powers of recovery such as the right to sell or foreclose
without the intervention of the courts ?

State Loans. The various drawbacks in the existing
system of State loans have been already stated in Chapter III.
The problem in regard to these loans may be said to be
threefold. First, how are the administrative defects to be
remedied ? Secondly, under what conditions can State
loans be usefully granted ? Thirdly, what is the best agency
for their distribution ?

Joint-Stock Banks. The problem of joint-stock banks has
been well analysed by the foreign experts who assisted the
Indian banking inquiry. Formed on the English model
the Indian banks ' are not doing any industrial financing
business nor any stock exchange business which is left in
England to the private banker. ... As there is no general

THE BANKING INQUIRY, 1929-31 165

agency in this country devoting its banking activities to
the business done by the London private banker, it is no
doubt worth the while to examine the question whether
these commercial banks ought not to accept the German
system of more universal banking.' 1

Taking the Indian joint-stock banks as they are it is
agreed that they are not well developed. ' Very little or
no use at all is made of bankers' acceptances; this may
partly be due to the pattern of the English banks which
formerly but not any longer left the acceptance business
to special firms or institutions, relying themselves for their
working capital mainly on the vast resources of deposits;
the principal reason lies, however, apparently in the limited
money market in India/ 2 Lastly, there is the problem of
suitable banking legislation with a view to protecting the
public against abuse on the part of dishonest or incompetent
bank management. 3

Exchange Banks. The problem of the exchange banks is
one on which there is sharp conflict of opinion not only
between the foreign experts and the Banking Committee, 4
but between the members of the Committee itself. 5 Accord-
ing to the foreign experts, ' the benefit which the trade of the
country derives from the existence of the exchange banks
largely exceeds the disadvantages. The country has the
resources of some of the strongest institutions of the world
at its disposal for a form of international finance which re-
quires strong capital and connections.' 6 On the other hand,
six members of the Banking Committee in a minute of dis-
sent state (i) ' that all is not well with the foreign trade
of India, particularly with reference to the benefit from it

1 Experts' Memorandum I., Indian Banking Committee Report, 1931,
p. 624.

2 Ibid.

1 Ibid., p. 628.

4 Experts' Report, Indian Banking Committee Report Volume, pp. 645 et seq.

5 Minutes of Dissent by Six Members of the Committee, Indian Banking
Report, op. cit., pp. 582 et seq. 6 Banking Report, op. cit., p. 646.

166 THE MONETARY PROBLEMS OF INDIA

to the nationals; and (2) that the absence of adequate bank-
ing facilities for this purpose as supplied by the Exchange
Banks has militated against Indians acquiring their due
share in the trade, and the loss to the country as a whole
by this handicap to the commercial community is enormous.' 1
The position of the Banking Committee lies midway between
these two. From the purely trading point of view they
regard the existing facilities as sufficient, 2 but after fully
weighing all considerations they have definitely come to
the conclusion that ' it is not desirable that India should
rely for all time on the facilities afforded by non-Indian
institutions for the financing of her foreign trade.' 3

Imperial Bank of India. The problem of the Imperial
Bank of India is that it suffers from restrictions and govern-
mental control which were imposed on it on account of its
' hybrid nature.' A revision of the Imperial Bank of India
Act may now take place any time after Government has
given the bank one year's notice, and the question of the
nature of changes to be incorporated in the new Act is there-
fore of great importance

Post Offices. The only important problem with regard to
the post offices is that the facilities they offer may well be
improved and extended. But opinion seems divided on
the question of the encouragement of postal cash certificates,
those against this procedure urging that the certificates
compete with joint-stock banks in the attraction of funds.

Stock Exchange. Barring the stock exchanges of Bombay
and Calcutta there is no regular investment market in
the country. * Investment banking institutions with an
organisation for investigation into the merits of industrial
issues, for underwriting such issues and for marketing
the securities are as yet unknown. Such institutions can,
if founded, assist materially in the flotation of sound

1 Indian Banking Committee Report, 1931^.584. 2 Ibid., para. 477.

2 Indian Central Banking Inquiry Committee Report, 1931, para. 482.

THE BANKING INQUIRY, 1929-31 167

concerns, give a ready marketability to their securities
and inspire public opinion in such forms of investment.' 1
Unless, however, there is sufficient business, no exchanges
can be established.

The Money Market. Taking the Indian money market as
a whole it is almost a truism to say that it does not bear
comparison with the highly developed money markets of
the west. In fact, as the foreign experts remark, there are
in the country two money markets the Central money
market and the Bazar money market, with their own agencies
and rates of interest and without sufficient co-ordination.
The former is ' to a large extent dominated by Government,
which controls the currency and exercises a decisive influence
on the bank rate/ 2 Another serious evil is the partition of
the control of currency and credit between two agencies
viz., the Government and the Imperial Bank of India with
its consequent lack of elasticity and large variations in
rates of interest.

3. SUGGESTED SOLUTIONS.

Provincial Board of Economic Inquiry. Having briefly
reviewed the nature of the problems, attention must now be
turned to the solutions suggested by the Banking Inquiry
Committee. It was pointed out in the preceding section
that besides the provision of credit a progressive and con-
structive agricultural policy is required to develop a profit-
able agricultural industry. With a view to providing
Government with necessary data for pursuing such a policy,
the first recommendation of the Indian Central Banking
Committee is that a Provincial Board of Economic Inquiry
should be established in each province (73) . 3

Settlement of Rural Indebtedness. Coming to the problem

1 Indian Central Banking Inquiry Committee Report, 1931, para. 655.

2 Indian Banking Committee Report, 1931, p. 648.

a The figures in brackets, throughout this chapter, refer to the relevant
paragraphs of the Indian Central Banking Inquiry Committee Report, 1931.

168 THE MONETARY PROBLEMS OF INDIA

of rural indebtedness, the Royal Commission of Agriculture
in India took a very serious view of the matter and remarked
that ' it must be clearly recognised that the worst policy
towards debt is to ignore it and do nothing.' 1 The Banking
Committee is of opinion that attempts to relieve prior in-
debtedness may be usefully made in localities where co-
operative land mortgage banks exist and that more of such
banks should be established in places where they are likely
to prove successful. But to satisfy the credit requirements
of the large class of agriculturists who are outside the co-
operative movement and to provide substantial loans to big
landlords, Provincial Land Mortgage Corporations on a
joint-stock basis or on the model of the English Land Mort-
gage Corporation are necessary (87) .

In addition, a scheme of debt conciliation on a voluntary
basis mainly with the aid of co-operative agency and special
officers is recommended (91). Further, in view of the fact
that the present insolvency law is too complex for rural
borrowers who are prepared to give up all their assets in
discharge of an inherited debt, the introduction of a simple
Rural Insolvency Act is suggested (93). Lastly, the possi-
bility and desirability of undertaking other legislation to
secure the settlement of debts on a compulsory basis should
be explored by Government (94) .

Moneylenders. With a view to controlling and reforming
the activities of the moneylender, the Punjab Regulation of
Accounts Act, 1930, is commended to the consideration of
other provincial governments for consideration. At the same
time the retention of the Usurious Loans Act and the in-
clusion of a special report on its working in the annual reports
on the administration of civil justice is suggested, inasmuch as
the Act is capable of being worked to the advantage of debtors
in many ways. Further, provisions similar to the following
in the English Moneylenders Act are recommended for intro-

1 Report of the Royal Commission on Agriculture in India, 1928.

THE BANKING INQUIRY, 1929-31 169

duction in India which should apply to moneylenders as
defined in the Punjab Regulation of Accounts Act, 1930. 1

(a) No amount shall be charged by the moneylender for the
expenses incidental to or relating to the negotiations for or the
granting of a loan. If it is found necessary to permit the money-
lender in India to recover certain classes of expenditure from the
borrower, these should be clearly specified in the legislative
enactment.

(b) The increase of interest for default in payment should be
illegal.

(c) No contract for the repayment of money lent by a money-
lender shall be enforceable if there is no note or memorandum
in writing of the contract made and signed by the borrower or if
it is proved that such note or memorandum was not signed before
the money was lent (122).

Various other suggestions are made for improving the
moneylenders' position. For instance, (a) they could join
co-operative societies, provided they do not lend to the
members of the same societies privately; (b) the experi-
mental formation of the co-operative societies of money-
lenders which should lend to the primary societies and not to
individuals; (c) entrusting moneylenders with the agency
functions of joint-stock banks; (d) contact of joint-stock
banks with the registered moneylenders on what are known
as ' kommandit ' principles. 2 Finally, it is suggested that

1 The definition excludes from the operation of the Act financial trans-
actions between merchants and also loans to traders.

* The Kommanditgesellschaft auf Aktien is a German form of a joint-
stock company, where at least one person, who also manages the company,
but does not necessarily hold shares, is personally liable to the creditors
of the company. This or these persons are, so to say, the partners of the
community of stockholders; their position towards the stockholders is
therefore more independent than that of a manager or managing director;
his income consists in a share of the profits. The form had been almost
abandoned in Germany, but has come in use again more recently with banks,
because it naturally increases the confidence of the depositors. One could
imagine that this legal form has some attraction with smaller joint-stock
banks in this country, because it removes the depositors' apprehension
that the directors may, as has unfortunately been the case occasionally,
manage the bank unduly in their own interest, and it may appeal to the
indigenous bankers to form a joint-stock company in which they will

170 THE MONETARY PROBLEMS OF INDIA

such moneylenders as may satisfy the necessary conditions
mentioned below (p. 156) may even become members of the
proposed Reserve Bank (143).

On the other hand, as the Pathan moneylenders are
notorious for harassing their clients, it is recommended that
failing ordinary law, Government should take special action
and deport those moneylenders who are a menace to society.
Further, the courts should be empowered to dismiss cases
instituted by moneylenders for recovery of sums on pro-
missory notes, stipulating that the loan shall be repaid in any
of the several districts mentioned therein (122).
/ Indigenous Bankers. As for the indigenous bankers, it
is suggested that they should be brought into direct relation
with the Reserve Bank as soon as it is formed, so that they
may be linked up with the general money market and their
status may be improved and raised therein. It is recognised,
however, that before this can be done, the bankers must
submit to certain obligations viz., (a) confine themselves to
banking business only, (&) satisfy a standard regarding their
capital and reserve such as may be framed by the Reserve
Bank, (c) maintain proper books of accounts subject to
regular audit and inspection by the Reserve Bank, (d) keep
compulsory deposits with the Bank (but for the first five
years of the Bank's working, bankers whose deposits do not
exceed five times their capital may be exempted from this
condition), and (e) charge the public such rates as are not
' unduly high.'

As against the foregoing obligations, it is contemplated
that the indigenous bankers will enjoy the following privileges
viz., (a) be eligible to be placed on the approved list of the
Reserve Bank in the same manner as the joint-stock banks
and have their bills discounted by the Reserve Bank (139),

occupy an independent position justified by their personal ability. Every
company law ought to offer various models of joint-stock companies
for selection, and this may be one among others. (Indian Banking Com-
mittee Report, p. 629.)

THE BANKING INQUIRY, 1929-31 171

(b) receive facilities for remittance of funds through the
Imperial Bank or the Reserve Bank on the same terms as the
joint-stock banks (142), (c) get the benefit of the Bankers*
Books Evidence Act (142). l

In the case of indigenous bankers whose principal business
is not banking, or who do not adopt banking as their principal
business as soon as the Reserve Bank is established, the
adoption of a more liberal policy in granting facilities by the
Imperial Bank and other joint-stock banks is commended
for their sympathetic consideration (144).

Co-operation. With regard to the co-operative movement,
the Banking Committee has made a number of very useful
suggestions for improving the organisation and methods of
business, training of staff, reduction of interest rates, pro-
vision of State aid and the linking up of co-operative agencies
with joint-stock banking and the Reserve Bank. The
suggestions in regard to organisation and business are as
follows :

(a) Ordinary societies should confine themselves to short term
and intermediate credit, long term credit being provided by land
mortgage banks discussed below (165).

(V) Central banks may lend to societies at concessional rates
amounts not exceeding the reserve fund in deposit with them
(155). They should start a bad debt fund, and carry a reasonable
amount of profits to that fund, in addition to the statutory
allocation to Reserve Funds (157).

(c) Provincial banks should continue to be bodies incorporated
under the Co-operative Societies Act. The executive head of a
provincial bank should be a thoroughly trained banker with
competent knowledge of the principles and practice of co-
operative credit. Provincial banks should not deal directly
with primary societies, but should consolidate and strengthen
their position as financing agencies and balancing centres for
central banks (159).

(d) The present legal provision in Section 19 of the Co-operative

1 Cf . my almost identical suggestions to the United Provinces Banking
Inquiry Committee, 1929-30, Evidence, vol. ii., pp. 129-30.

172 THE MONETARY PROBLEMS OF INDIA

Societies Act, 1912, gives the society a prior claim, subject to
that of Government, over other creditors of the members in respect
of overdues of money available for agricultural requisites, but
there is no specific charge. It is recommended that the prior claim
should be converted into a first charge. 1

(e) With a view to popularising the movement and promoting
a sense of responsibility among members existing official control
should be slackened (168). But there should be strict scrutiny
of the economic purpose of the loan and the borrower's repaying
capacity before loans are given, and no leniency should be shown
in the matter of extension of loans or in dealing with defaulting
members (170).

(/) Further, a special scheme of audit, the introduction of the
normal credit system, granting credits on current account, and
introduction of cheque transactions, wherever possible, are
recommended (171, 173 and 174).

The Committee laid due emphasis on special steps being
taken for the efficient and adequate training of both the
official and non-official co-operative staff and for inculcating
on the co-operators the true principles of rural credit. It
also said that endeavours should be made to secure trained
secretaries for the societies. If the panchayat of a society
were to advance loans beyond its legal powers, members
should be held personally liable as guarantors of the loans,
and the rules, if necessary, should be amended accordingly.
Further, central banks should operate over fairly large areas
with a good number of societies affiliated to them, and they
should be run on strict businesslike and co-operative lines

Interest rates can be brought down if, among other things,
the working expenses of the central banks are reduced and
savings are directly tapped by the rural societies. If a
rural society charges its members more than 12 per cent.
per annum, a careful inquiry should be instituted by the

1 In Bombay the prior claim under the All India Act is already converted
into a first charge by the local Act.

THE BANKING INQUIRY, 1929-31 173

provincial government and the provincial bank concerned
and steps should be taken to reduce the rate of interest (176).
The following suggestions are made regarding provision
for State aid and the connexion with commercial banking
with a view to ensuring the supply of cheap and adequate
credit to Indian agriculture.

(a) The Imperial Bank of India should offer cash credit and
overdraft facilities on a liberal scale against approved co-opera-
tive paper (181).

(b) Free remittance of funds for co-operative purposes being
of the utmost importance to the co-operative movement, no
attempts should be made to curtail these privileges under the
rules of the Government of India. As regards remittance facilities
for other than co-operative purposes, co-operative banks should
be entitled to the same terms as joint-stock banks (182).

(c) On the whole, co-operative banks do not and need not
compete with joint-stock banks, except in respect of loans
against produce. Such loans are of special economic benefit to
cultivators and should be encouraged subject to the by-laws of
the societies and to suitable storage accommodation.

(d) If State aid is required in exceptional circumstances the
State should give temporary and sufficient aid to enable the
tiding over of the crisis. Similarly the State should provide
such funds as it can if in its opinion they are required by the
societies for the development of agriculture. Contributions
from Government funds to the expenses of the movement in
backward tracts and among backward classes should be increased

(e) Certain provisions should be made in the Reserve Bank
Act for the linking up of the co-operative banks with the central
bank of the country.

For extending the movement, special efforts should be made
to promote special types of societies, e.g. societies for joint
cultivation, for providing manure and seeds, processing
societies such as rice-hulling, cotton-ginning, etc. The
Co-operative Societies Act should be amended so as to permit

174 THE MONETARY PROBLEMS OF INDIA

registration of societies of an All-India character, or societies
operating in more than one province (161).

Among miscellaneous suggestions the Committee re-
commends that the profits of the co-operative societies
should be exempt from both income-tax and super-tax (195).
In regard to earnings from investments in public securities
on land mortgage debentures, however, the exemption from
these taxes should apply to the extent that such investments
are necessary for the purpose of the societies' fluid resources
and for the investment of reserve funds, as prescribed by the
rules (196).

Land Mortgage Banks. Although land mortgage ba nks are
not yet developed in India their constitution has been the
subject of thorough examination and almost unanimous
agreement by the conference of Registrars of co-operative
societies in India in 1926 and in 1928, by the Royal Com-
mission on Agriculture in India in 1928 and by the Banking
Inquiry Committee quite recently. Recalling to mind the
questions affecting the land mortgage banks set out in full
above (pp. 163-164), we may now turn to the answers
suggested.

As to the objects of these banks, the Banking Committee
fully endorses the following recommendations of the ninth
conference of Registrars 1 (1926) embodied in the following
resolution, but would place the object 2 (c) along with 2 (a)
first.

(1) Mortgage banks based on co-operative principles are
desirable in many parts of India. No transaction should be
undertaken which is not economically profitable to the borrower.

(2) Objects. The principal objects should be:

(a) The redemption of the land and houses of the
agriculturists.

1 Proceedings of the Ninth Conference of Registrars of Co-operative Societies
in India, 1926, pp. 83-91.

THE BANKING INQUIRY, 1929-31 175

(b) The improvement of land and of methods of cultiva-

' tion and the building of houses of agriculturists.

(c) The liquidation of old debts; and

(d) The purchase of land in special cases to be prescribed

in the by-laws. (Para. 218.)

The amount and period of the loan must really depend
upon the purpose of the loan and the borrower's repaying
capacity, but for the present the maximum amount of the
individual loans should be R. 5,000 and the maximum period
20 years (219). Repayment should be effected generally by
a system of equated instalments, graduated instalments being
permitted if they are necessitated by local conditions (220).

The working capital of the co-operative land mortgage
bank should be derived from share capital and debentures.
The former should be raised by deducting 5 per cent, of the
amount borrowed by members at the time the loan is ad-
vanced. Where necessary, provincial governments should
make advances free of interest on condition that repayments
are made out of the realisations from debenture issues. It
with the development of the banks larger capital is required,
provincial governments should consider the advisability of
providing it (221).

The Committee is of opinion that the proportion of the
debenture to the share capital need not, as recommended by
the experts, 1 be limited to 5:1, but should be left to the
discretion of the co-operators in each province. In no case,
however, should the value of debentures outstanding ex-
ceed the outstanding amount under mortgages given by the
borrowers and over which the debenture holder has a floating
charge. For the success of the debenture issue Government
should guarantee the interest on debentures for the whole
period of their currency and, subject to adequate redemption
arrangements, include the debentures among trustee securities

(221).

1 Experts' Memorandum, Indian Banking Committee Report, p. 709.

176 THE MONETARY PROBLEMS OF INDIA

The debentures should be issued by a central institution
called the Provincial Land Mortgage Corporation, but the
actual sale should be made by the primary land mortgage
banks as well. The latter, which may be called district
mortgage banks, should operate over fairly large areas and
should be entitled to obtain the necessary finance from the
former. Until the formation of the Provincial Land Mort-
gage Corporation, the primary land mortgage banks may
be financed by the Provincial Co-operative Bank with long-
term capital specially raised for the purpose (222).

The Committee is not in favour of permitting land mortgage
banks to receive deposits like co-operative central banks for
at least some time to come, for short-term deposits are not
suitable for the purpose of the liquidation of old debts with
which these banks will be primarily engaged in the beginning
of their career (224). As for the relationship between the
mortgage banks and the co-operative credit societies, it is
recommended that they should work entirely apart and the
two should be quite separate. But if a member of a credit
society applies to a land mortgage bank, the latter should
ordinarily consult the former without losing its responsibility
for granting the loan (223).

Lastly, it is suggested that the land mortgage bank should
be given the power of foreclosure and sale without recourse
to the civil courts subject to certain safeguards, and that the
insolvency law should be amended so as to give greater
protection against avoidance of mortgage by the unsecured
creditors of the insolvent (225-226). In this connexion the
Committee examined the operation of the Land Alienation
Act and of several Tenancy Acts which restrict in various
ways the free alienability of land. From a purely banking
point of view it seems undesirable that there should be any
such impediments to the free transfer of land, but as other
considerations are involved, the Committee would prefer the
provincial governments and legislatures to take all factors

THE BANKING INQUIRY, 1929-31 177

into account in determining their policy. But it recommends
an alteration in the Land Alienation Acts so as to give the
land mortgage banks the right to take possession of and
to sell land through foreclosure on default of the payment
of the instalment of the loan (228).

State Loans. In regard to State loans there are three
questions, viz. administrative defects, conditions under which
loans may usefully be given and the proper agency for their
distribution. The last matter has been dealt with in Chapter
III. (p. 87), while the remedies suggested with regard to the
administrative defects are summarised below.

(1) Delay in the Disposal of Loan Applications and Levy of
Illegal Gratifications. Provincial Governments should take steps to
minimise delays in the disposal of applications for takavi loans and
to lessen the opportunities for illegal gratification by employment
of officers of some standing (240).

(2) Insufficiency of Loans. Where funds are insufficient,
advances might be restricted to a smaller number of recipients
whose need is the greatest, and their requirements might be
satisfied in full. Loans should be given on a more liberal scale
than at present (240).

(3) Strictness in Realisations. Any laxity in realisations of
takavi loans is not desirable, but liberal suspensions and remis-
sions, when necessary, should be granted. Dates of repayment
should be fixed with due regard to the date of harvest, and repay-
ment of cattle loans should be allowed in two kists (instalments)
in place of one. Similar loans advanced in times of distress
should be recovered in instalments (240).

(4) Unfairness in Realisation of Joint Bonds. When joint
bonds are taken the amount due from each individual borrower
should be entered separately in the bonds, every attempt should
be made to realise from each individual the amount so shown , and
joint liability should be enforced only as a last resort and even
then apportioned as fairly as possible (240).

As for the condition and objects of takavi loans, Govern-
ment may well be guided by (i) the policy followed in

12

178 THE MONETARY PROBLEMS OF INDIA

Bijapur in the Bombay Presidency which has a definite
scheme of agricultural improvement and famine protection, 1
and (2) the important observations made by the Indian
Famine Commission of 1901, e.g. : 'Advances under the
Agriculturists' Loans Act are most profitably given for the
purchase of seed grain for the rabi harvest at the very com-
mencement of the famine and again for the purchase of
plough cattle and seed in the months of May and June in
anticipation of the kharif sowing . . .' (para. 250 of the
Famine Commission Report). It is further suggested that
the operation of the loans should be restricted to relief of
distress (242), but State loans should not replace the famine
relief (243).

Joint-Stock Banks. The Banking Committee makes two
recommendations with regard to the business of joint-stock
banks, first, that they should extend the system of advances
against precious metals (252) and on the personal credit of
b6rrowers (555), and, secondly, that with the establishment
of the Reserve Bank they should do all they can to offer
cheap remittance facilities to the public.

With regard to their organisation, it is suggested that the
banks should aim to combine the efficiency of the European
system with the economy of the indigenous bankers (547).
No obstacles should be put in the way of mergers among
smaller joint-stock banks by stamp duties or taxation, and
any existing obstacles in this direction should be removed
(549)- The banks should be encouraged to open new
branches, where there is no joint-stock bank, by the Reserve
Bank placing with every such branch a deposit of such sum
and on such conditions as it considers necessary, for the first
five years (530). The banks should also consider the open-
ing of sub-offices or part-time branches in small centres
contiguous to places where there are regular branches of

1 The details of the scheme are given in para. 107 of the Bombay Banking
Committee Report, 1929-30.

THE BANKING INQUIRY, 1929-31 179

banks (546). No new branches should be opened without
the approval of the Reserve Bank, which should grant
licences freely to the already established branches (545).

The banks can render better service if they pool informa-
tion in regard to customers and organise a suitable system
of collecting reliable information. Further, their position
can be strengthened if the impediments in the way of banks'
accepting immovable property of a Hindu or Mahomedan
family as a normal security are removed (562); if Sec-
tion 58 (/) of the Transfer of Property Act 1 is extended to
commercial towns where people are fairly advanced (563);
and, lastly, if the Negotiable Instruments Act is amended
so that a cheque originally drawn ' bearer ' shall remain
* bearer ' despite any endorsement. A ' bearer ' cheque
may, however, be altered to ' order ' by the drawer or the
holding endorser putting his name on its face. Hundis
drawn in the form of cheques should be similarly treated

(564).

Banking Legislation. As for banking legislation, any
bank, Indian or non- Indian, wishing to do banking business
in India should be required to take out a licence from the
Reserve Bank, which should make no difficulty in granting
licences, but shall see that all the legal requirements are
fully satisfied (684). There should be a special Bank Act,
and all banking firms incorporating under it should make
adequate provisions in the Memorandum and Articles of
Association regarding (a) prohibition of activities other than
banking; (b) powers of directors regarding registration of
transfers of shares (699) ; (c) the standing of a shareholding
member to entitle him to participate in the proceedings of
a banking company (700) ; (d) prohibition of a loan on the

1 By it equitable mortgages are created by a simple deposit of docu-
ments, without any mortgage instrument or registration. The Section
applies to Calcutta, Bombay, Karachi, Rangoon, Moulmein, Bassein and
Akyab, and in any other town which the Governor-General in Council may,
by notification in the Gazette of India, specify.

i8o THE MONETARY PROBLEMS OF INDIA

security of a bank's own stock (709) ; (e) limitation of loans
to directors, managers, and members of the staff of the bank
(710) ; (/) borrowing powers of directors on behalf of a bank
(712); (g) qualifications, appointment, retirement and voting
powers of directors and officers of banks (713) ; (h) holding
of proxies by officers and employees of a bank, the ad-
missibility of a general form of proxy and the maximum
period of its duration and validity (714-715); (i) voting
power of individual shareholders and validity of votes at
the poll (716-717); (j) last date for posting the directors'
report and balance-sheet to the shareholders (731).
The Act itself should provide for :

(i.) A majority of natural born or domiciled Indian directors
and shareholders, and incorporation under the Indian law (689-
690).

(ii.) Prohibition of the organisation of a bank on the managing
agency system (693) .

(iii.) A minimum paid-up capital of R. 50,000, the paid-up
capital being never less than 50 per cent, of the subscribed and
the subscribed never less than 50 per cent, of the authorised
capital (695).

(iv.) A separate index of names of all members and a separate
register of shares owned by non-nationals (697-698).

(v.) A decision of the directors within two months of the
presentation of the transfer deeds to the bank whether transfers
shall be registered or not (700) .

(vi.) Filing of particulars of certain mortgages and charges
with the Registrar of Joint-Stock Companies of the province (701) .

(vii.) Registration of certain prior charges on immovable
property acquired by a bank (702) .

(viii.) Recording of the satisfaction of a mortgage before the
Registrar (703).

(ix.) Allocation of at least 2\ per cent, of a bank's paid-up
capital before distribution of dividend, to a reserve fund until
the fund equals the paid-up capital (704).

(x.) Prohibition of advances and restrictions in payments
beyond their remuneration to auditors (711 and 721).

THE BANKING INQUIRY, 1929-81 181

(xi.) Prevention of a mortgage or charge on a bank's uncalled
capital (712).

(xii.) Liability of officers and directors for omission of material
facts in their reports or accounts (720).

(xiii.) A revised balance sheet (730), specimen indicated, and
its display in lieu of Form G (732).

(xiv.) Treatment of bad and doubtful debts (727).

(xv.) Cost or market price, whichever is lower, as the basis
of valuation of securities (729) .

(xvi.) Holding the annual general meeting not later than
three months after the close of a year (734).

(xvii.) Temporary moratorium on the Reserve Bank's recom-
mendation in times of difficulties (735).

(xviii.) Appointment of a liquidator by the Reserve Bank or
with its approval, in case of a bank's voluntary liquidation (739).

(xix.) Safeguarding of the creditors' interests on the lines of
the English Companies Act, 1929, in case of compulsory liquida-
tion (740).

(xx.) Appointment of committees of inspection in the event
of a bank's compulsory or voluntary liquidation (741).

(xxi.) Giving the actual numbers of a bank's shares by their
seller at the time of their sale (748) .

The above Act should apply within five years of its passing
to all banking companies other than banks registered under
the Indian Co-operative Societies Act or under any special
charter or enactments and banks registered under laws of
other countries (682). In the case of a non- Indian bank
taken into liquidation, there should be some arrangement
under which the Indian creditors of the banks should have
a prior claim on its assets in India and should also share in
the general distribution of its assets outside India, if the
assets in India are insufficient (743).

Regulation of loans by banks should be left to the dis-
cretion of the management and the control of their boards
of directors (708).

Exchange Banks. Regarding the exchange banks the
Banking Committee makes two important and several minor

182 THE MONETARY PROBLEMS OF INDIA

recommendations. In the first place, all non-Indian banks
must take out a licence from the Reserve Bank on certain
specified conditions e.g., furnishing to the Reserve Bank
statements re assets and liabilities of their business in India,
periodical reports of their Indian and non-Indian business,
etc. Licences should be freely granted to banks already
established (451).

In the second place, the more important Indian joint-
stock banks should open useful foreign connexions and the
Imperial Bank of India should be induced to take an active
share in financing India's foreign trade when the Reserve
Bank is established and the Imperial Bank is shorn of the
present restrictions on exchange business (483). Failing the
Imperial Bank, the establishment of an Indian Exchange
Bank is recommended (485-486). At the same time the
suggestion for the promotion of joint banks (partnerships on
equal terms between Indians and Europeans) is supported
and may be usefully explored by Indian joint-stock and
foreign banks (492).

Among other suggestions may be mentioned the desira-
bility of (i) employing and training more Indians in higher
posts, and (2) the exchange banks accepting import bills
instead of purchasing them, in the same way as they accept
house paper of a London export house. If, however, Indian
importers find it convenient to have the exporters draw on
them in nipee bills, the exchange banks should co-operate
and encourage all efforts in this direction (430).

Imperial Bank of India. The main recommendation of
the Committee is that the restrictions imposed by the
present Act on the Imperial Bank's transacting foreign
exchange business or other class of business, but which are
not imposed on the operations of Indian joint-stock banks,
should be withdrawn. The intention is that this should
happen only after the proposed Reserve Bank is constituted
and the Imperial Bank assumes the same position as other

THE BANKING INQUIRY, 1929-31 183

joint-stock banks. But on the whole it seems desirable that
the Imperial Bank should continue to have a charter of its
own (528-529). Finally, special emphasis is laid on the
Indianisation of the bank's staff (532).

Post Offices. The improvement of the existing deposit
and investment facilities afforded by the post offices is
suggested in the following ways :

(i.) The limit in respect of minors' accounts, which at present
is R. 1000, should be raised (645).

(ii.) Persons having Post Office savings accounts should be
allowed to operate on these accounts, and to make deposits by
means of cheques (646).

(iii.) Joint accounts should be allowed in the name of two
persons payable to either or survivor (646).

(iv.) Depositors of savings and holders of postal cash certificates
should be allowed to appoint nominees to whom the payment
of deposits should be made or the amount of certificates trans-
ferred in the event of the formers' death (646-647) .

(v.) Wider publicity should be given to the facilities afforded
for the purchase, sale and safe custody of Government se-
curities, and these facilities should be extended to small inves-
tors generally and not confined to savings bank depositors
(651-2).

Other suggestions for the development of savings and the
investment habit include (a) issue of savings certificates
payable in gold, as recommended by the last Commission
on Indian Currency and Finance 1 and of a new type of gold
certificate for women, as suggested in the Behar and Orissa
Banking Committee 2 (649-650); (b) reduction of banks'
charges in the purchase and sale of securities and other
incidental services (653) ; (c) extension of facilities for pay-
ment of land revenue by cheque to taluka sub-treasuries
and district treasuries and extended use of cheques in pay-
ments by Government and public bodies (665) ; (d) the forma-
tion of National Savings Associations in all provinces (667) ;

1 Report of the Commission, 1926, paras. 67-68.
* Report of the Committee, 1929-30, para. 486.

i4 THE MONETARY PROBLEMS OF INDIA

and (e) the investment by all insurance companies, Indian
or non-Indian, of a fixed proportion of their funds in
approved Indian securities (660).

Stock Exchange. While it is true that in the absence of
sufficient business no exchanges can be established, existing
banks and their branches, including co-operative banks and
other financial organisations, may render useful service by
undertaking the work of buying and selling stocks and
securities for their customers on a commission basis (655).

Reserve Bank. For the orderly development and compact
organisation of the Indian money market, the Banking
Committee has recommended the creation of a Central or
Reserve Bank at the earliest possible date. The question
of the constitution of such a bank is not discussed, but the
Committee has based its recommendations on four clear
assumptions viz. : (t) that the Bank would be established by
an Act of the Indian Legislature, (2) that its capital would
be provided by the State, (3) that it would be under Indian
control, and (4) that it would not be interfered with in
its day-to-day administration by either the executive or the
legislature (Indian or British). 1

As regards the business of the Reserve Bank, it is suggested
that the old Reserve Bank Bill 2 may be so modified as (a) to
enable the Bank to make loans and advances on the security
of movable goods, wares and merchandise as well as against
the warehouse warrants or receipts representing such goods
(607) ; (b) to permit the Bank to purchase, sell and rediscount
rupee import bills (608); (c) to let the total face value of
agricultural bills held by the Bank go up, at its discretion,
to the amount of its share capital (609) ; (d) to extend the
period of agricultural bills from six to nine months (611);
(e) to empower the Bank to borrow money up to the amount
of its share capital and reserve fund (611); (/) to provide

1 Indian Central Banking Inquiry Committee Report, 1931, pp. 418-19.

2 See above, p. 32.

THE BANKING INQUIRY, 1929-31 185

necessary concessions 1 for indigenous bankers (613); and
(g) to permit the Bank to act as agents for Indian States (611).
The establishment of the Reserve Bank would in itself
stimulate the development of the bill market in the country
inasmuch as it would dispel the present prejudice on the
part of joint-stock banks against the discounting of bills
(593)- But other suggestions are made, as given below:

(a) When the Reserve Bank is established, it should use its
discretion to charge a higher rate for demand loans against
authorised securities and, at the outset, it may find it useful to
have a larger margin between these rates than will be necessary
after the bill market has developed.

(b) Establishment of warehouses.

(c) Abolition of stamp duty on bills within a period of five years.
As an initial step the duty on all bills of less than one year's usance
should be reduced to a uniform rate of 2 annas per R. 1,000.

(d) Standardisation of customs re hundis in particular regions,
if not for the entire province.

(e) Expeditious procedure for disposal of suits based on nego-
tiable instruments on the lines of Order XXXVII. of the Civil
Procedure Code in places where hundi business is important.

(/) Joint efforts on the part of commercial bodies and Govern-
ment in various directions to encourage the use of bills (593).

All-India Bankers' Association. With a view to arriving
at a better understanding of their common problems and
interests it is suggested that the joint-stock banks, the
exchange banks, the Imperial Bank of India and the in-
digenous bankers should all form an All-India Bankers'
Association. There should be two kinds of membership
full membership, open to banks and bankers enjoying re-
discount facilities from the Reserve Bank, and associate
membership, open to the rest of the banks and bankers (620).
At the same time it is recommended that the exchange
brokers should not have more than one association at each
centre 2 (623).

1 See above, p. 170. * See above, p. 109.

i86 THE MONETARY PROBLEMS OF INDIA

Banking Statistics. Pending the establishment of the
Reserve Bank, it is suggested for the consideration of
Government that efforts should be made to obtain more
complete statistics for the various classes of banking institu-
tions and to publish them with as little delay as possible

(627).

Banking Education. Finally, there is the question of
banking education, on which the committee makes the
following useful recommendations :

(a) Every university should provide for the training of students
at recognised institutions by courses for commercial degrees

(755).

(b) The Institute of Bankers might make arrangements for
University lectures and courses of instruction at different centres
in commercial subjects (761 and 769).

(c) Young Indians possessing high qualifications, after pre-
liminary training in banks at home should be encouraged to go
abroad to study advanced banking, especially international
exchange and other subjects connected with currency and
exchange (766).

(d) Where possible, systematic instruction in elementary
accounting, discount, co-operative principles and elements of
banking should be given in secondary schools (768).

(e) Sons of indigenous bankers should be encouraged to join
joint-stock banks (771).

(/) Co-operation might be included as an optional subject in
the curriculum of the Institute of Bankers (773) .

(g) The closer study of marketing of agricultural produce
should be introduced in co-operative training institutes (776).

(h) Co-operative educational institutions should be established
in every province with an All-India Co-operative College for the
higher study of co-operation and allied subjects and research
work. The central and provincial colleges should be conducted
by the co-operators themselves with the possible assistance of
Government grants (779).

CHAPTER VII
THE FUTURE OUTLOOK

i. MONETARY REFORM.

THE foregoing analysis clearly brings out that the Indian
money market is highly disorganised and ill-developed, if it
can be called a money market at all. For a modern money
market is hardly conceivable without central stock exchange
organised to deal in bills of all kinds and a central bank.
India has no central bank, and is yet far from having a bill
market or central stock exchange. At the same time the
lack of a proper banking system is accompanied, as might be
expected, by the want of a satisfactory monetary mechanism.
The two are interdependent, but the desirable reform for
each may be examined separately.

Taking monetary reform first, the crux of the problem is
to determine the best monetary standard for the country.
In 1926 the question was answered by the Hilton Young
Commission in favour of the gold bullion standard. But it
fell short of the very merit they aimed at i.e., simplicity.
vSince then the situation has radically changed.

' Over the greater part of the globe the gold standard has
ceased to function: the Argentine and Uruguay suspended
gold payments in December 1929, and their exchanges were
allowed to depreciate ; Canada introduced temporary restric-
tions at the end of 1929, and in 1930 the exchanges of Brazil,
Chile, Venezuela, Paraguay, Peru, Australia and New
Zealand fell and remained below export gold point. In
September 1931 the United Kingdom abandoned the gold
standard. Before the end of October all the British

187

i88 THE MONETARY PROBLEMS OF INDIA

Dominions excepting South Africa, the rest of the British
Empire, and the three Scandinavian countries, as well as
Portugal, Egypt, Bolivia and Finland had departed from
gold. Japan followed in December 1931, Greece in April
1932, Siam and Peru in May 1932. a At the time of writing,
only some half-dozen countries in the world are left with
an effective gold standard.

Alternative Standards. Besides gold, it is possible for
India to have any one of the following standards : (i) sterling,
(2) silver, (3) bimetallic, or (4) a paper standard based on
the index number of prices for a large number of com-
modities. Barring gold, however, of the four alternatives,
the choice would probably lie between the first and the last
i.e., the sterling or the paper standards respectively. Both
silver and bimetallism have been advocated by writers in
recent articles, but to a large portion of the public they
appear to make no appeal, and it looks very doubtful that
they will ever command any substantial support from
Government.

Three Requisites. Whatever the standard, three requisites
are essential for its smooth working. Firstly, there must be
a proper apparatus; secondly, there must be the necessary
knowledge to use that apparatus ; and thirdly, there must be
adequate will or goodwill as the driving force. Or to employ
a homely analogy, there must be a good engine, an able
engine-driver and sufficient steam. A monetary standard
cannot succeed if its apparatus is defective. But even with
the best apparatus it might fail, if the knowledge to use it
were lacking or if it did not possess the confidence of those
whom it serves. Judged by these threefold requisites
physical, intellectual and emotional the sterling exchange
standard breaks down on the third and the paper standard
on the second. The sterling exchange standard, in spite of

1 Report of the Gold Delegation of the Financial Committee, League of
Nations, Geneva, 1932, para. 2.

THE FUTURE OUTLOOK 189

its long use, does not seem to satisfy Indian opinion. As
for the paper standard, its feasibility is at present doubtful
even in countries much more advanced than India.

Retention of the Gold Standard. Professor Keynes and
others have long recommended that the best monetary
standard is one stabilised in terms of a large number of
commodities directly rather than one stabilised first in terms
of one commodity i.e., gold. Theoretically speaking, there
is no doubt that the former standard is superior to, for it
is more stable than, the latter. But it presupposes an
amount of knowledge and international co-operation which
do not seem to be vouchsafed to the world at present, nor
are likely to exist in the near future. The Gold Delegation
of the League of Nations in their final report (para. 78) have,
after a thorough investigation, recorded their belief that ' at
the present stage of world economic development, the gold
standard remains the best available monetary mechanism/
The Board of the Bank for International Settlements at its
twenty-third meeting in Basle on nth July, 1932, also
expressed its unanimous opinion that the gold standard
' remained the best available monetary mechanism and the
one best suited to make possible the freejtow olworkLtracle
and of international finance.'

Necessary Precautions. But gold is no longer stable in
value in the pre-War sense ; its value is affected in the modern
world by a great many factors. Instability of gold prices
is one of the major evils from which the world is still suffering.
Before gold is allowed to form the basis of a monetary
standard in future, certain precautions are necessary to
ensure stable values. Some of the more important conditions
which Professor Gustav Cassel regards as essential pre-
cedents to the restoration of a gold standard in the present
state of the world are : a great reduction in the value of gold,
a radical redistribution of the world's gold reserves, the
resumption of a systematic gold economising policy, the

THE MONETARY PROBLEMS OF INDIA

cancellation of all claims for reparation and war-debt pay-
ments, definite guarantees against the repetition of such
extraordinary demands for gold as have occurred during
the last few years and, finally, the restoration of a reasonable
freedom of international trade and of international capital
movements. 1

Immediate Policy. The re-establishment of an inter-
national monetary standard must, therefore, take time.
It is attendant upon the fruits of the labours of the proposed
World Economic Conference following the Lausanne agree-
ments. The immediate desire of the British Government,
according to Mr. Chamberlain's statement at the Ottawa
Conference (August 1932), is to see a rise in the wholesale
sterling prices, and the best condition for this would be
a rise in gold prices, the absence of which inevitably
imposes a limitation on what can be done for sterling.
While a rise cannot be effected by monetary action alone,
the Currency Report of the Committee on Monetary and
Financial Questions at Ottawa supports the British con-
tention that an ample supply of short-term money at low
rates may have a valuable influence.

Other parts of the Empire, including India, are recom-
mended to act in accordance with the above policy as far
as possible by the creation and maintenance, within limits
of sound finance, of such conditions as will assist the revival
of enterprise and trade, but favourable monetary conditions
should be achieved not by inflationary measures, but by an
orderly monetary policy, safeguarded to restrain the scope
of violent speculative movements. 2 The recommendation
deserves full support in India.

Proposed Currency Board. The exact determination of
the future monetary standard for India must, of course,
await further developments arising out of the forthcoming

1 Professor Gustav Cassel's Memorandum of Dissent, Gold Delegation Report,
1932, p. 75. ~ The Times, i^ih August, 1932, p. 8.

THE FUTURE OUTLOOK 191

World Economic Conference. While it seems probable
that Indian monetary reconstruction would be best secured
by some form of a gold standard, such rapid changes are
occurring all over the world and in the realm of economic
thought that it would be best at present to keep an open
mind. When, however, the time is ripe for action, the
mistake of thinking that what is good for the Western
countries is also good for India must be avoided. The whole
question should be subjected to a thorough examination
on its own merits by a specially constituted Currency Board
in India. Another Royal Commission or a big committee
are not required; they would hardly justify the expense
they would entail. The purpose in view can well be served
by a small board comprising experienced representatives
of Indian finance, trade and industry and one or two
economists.

2. BANKING REFORM.

Monetary reform must be accompanied by banking reform ,
as both are essential to the development of the Indian
money market, using the term in its widest sense. The
evolution of the modern money market has usually been a
slow process even in the most advanced countries. The
English money market, for instance, is not the product of
a few years or even of a few decades, it is the outcome of
several centuries. India, however, need not take so long,
if she can profit from foreign experience and push along
the right lines with an unflinching energy and strong
determination.

The previous analysis indicates that India is not altogether
lacking in the elements which go to make up a sound banking
system. There do exist in the country indigenous bankers,
co-operative societies, commercial banks, exchange banks,
savings banks, investment securities, even some bills of
exchange and three stock exchanges, but they all need to be

IQ2 THE MONETARY PROBLEMS OF INDIA

greatly developed and well-organised. These institutions
may now be taken one by one.

Indigenous Bankers. Taking indigenous banking first, as
already noted, at present it consists largely of moneylending.
The best progress from the banking point of view lies in the
direction of the transformation of moneylenders into bankers
and of both into banks. 1 Their extermination is neither
desired nor desirable, but the sooner they adapt themselves
to the methods of modern banking the better for them and
for the country.

Co-operative Societies. There is no form of organisation
better suited to provide rural credit than that of co-operative
societies. ' A scheme of Government or Joint-Stock Bank
finance might reduce the rates of interest, but only co-
operation can teach the peasant to borrow at the right
time and in the right amounts and for right ends, and to
repay on the right date; and only co-operation can teach
him to save so that he may not have to borrow at all/ 2

The Banking Committee has already made valuable
suggestions regarding the improvement of co-operation,
which have been summarised in the preceding chapter.
The co-operative staff may well be strengthened by the
appointment of a Financial Adviser in each province.
There is such an officer in the Punjab, and according to the
report of the Punjab Co-operative Societies for the year
ending 3ist July, 1931 (p. i), ' his long experience of joint-
stock banking is not only of great use to the Registrar but
his advice is freely sought by our central banking institutions/

Joint-Stock Banks. The joint-stock banks are at present
limited both in numbers and in resources. They have
shown little evidence of either consolidation through amal-
gamation or of expansion through branch banking. But the
banking resources of the country are largely concentrated

1 See above, pp. 168-170. Also Indigenous Banking in India, 1929,
pp. 229 et seq.

s The Punjab Banking Committee Report, 1930, p 103

THE FUTURE OUTLOOK 193

in five principal banks viz., the Central Bank of India, the
Bank of India, the Allahabad Bank, the Punjab National
Bank and the Bank of Baroda. They are sometimes called
the ' Big Five ' of India, after the English fashion, although
they can be hardly compared in their resources to the ' Big
Five ' of England. They have, however, between them, a
capital and reserve of R. 6-3 crores, or nearly half of the entire
capital and reserve of all the Indian joint-stock banks (with
capital of R. i lakh or over) put together.

In a large country like India it is preferable for joint-stock
banking to expand by means of new branches of existing
banks rather than by more new banks. The former course
has the advantage of dividing the risk of the parent bank
over a number of branches, and overcoming the effects
of local crises much better than would be the case with
small independent institutions. The opening ol new branches
would, on the whole, lead to an increase in business and in
prestige. In this respect the principal joint-stock banks
might well emulate the example set by the Imperial Bank
by opening 100 branches.

But for Indian joint-stock banks at present, consolidation
is more important than expansion. The recruitment of a
well-trained staff with a knowledge of local conditions is
an important matter well worthy of earnest attention, and
it would be a great advantage if members of indigenous
banking families could be increasingly attracted to the
service of modern joint-stock banks. Finally, the banks
might consider the desirability of taking a hand in financing
the various industries of the country.

Exchange Banks. In dealing with the future of exchange
banks political considerations are sometimes allowed to
come in, but they have no place in a scientific treatment of
the subject. It serves no useful purpose to look askance
at the exchange banks because they happen to be foreign.
There is nothing particularly wrong in having branches

13

194 THE MONETARY PROBLEMS OF INDIA

of foreign banks in a country. England herself has them,
so have other countries. When the London offices of foreign
institutions like the Deutsche Bank and Credit Lyonnais
introduced large foreign capital into England to their obvious
advantage, Mr. W. F. Spalding, in an essay which he con-
tributed to the Institute of Bankers in 1911, made the
following significant observation :

' We are sure that in the banking and commercial development
of our country the results will amply demonstrate that wisdom
of our free banking policy, and that ultimately we shall come to
see that these foreign branch banks render us an important
service in the preservation of our Empire. It is certain that the
more they open here the greater will be the advantages to the
trade and finance of the country, internal as well as external.
Still more will they serve to promote that friendly and harmonious
understanding amongst other nations which follows more intimate
commercial intercourse, and always fosters the spirit of peace
necessary to the prosperity and wealth of the world/ 1

At the same time it is idle to deny the need and desir-
ability of Indian institutions developing foreign exchange
business in which at present they are very deficient. There
is no doubt that in existing conditions the foreign exchange
banks enjoy a virtual monopoly of their business in India,
and on account of their great resources and skilled and
scientific management they are formidable rivals to new
entrants into the field. The interests of the country do not
require their extermination, but a solution must be found in
which, on the lines of other countries, indigenous and foreign
enterprise in India may both have a proper place. In this
connexion the following remarks of the Government of
India are very appropriate and indicate the direction in
which a remedy must be sought.

' During the last ten years, in one branch of commerce and
industry after another, the evidence has been unmistakable

A Quoted in The Evolution of the Money Market (1385-1915), by Ellis
T. Powell, 1915, p. 388.

THE FUTURE OUTLOOK 195

that important sections of Indian opinion desire to secure the
rapid development of Indian enterprises, at the expense of what
British firms have laboriously built up over a long series of
years. There is nothing surprising in the fact that national
consciousness should thus have found expression. Indians who
desire to see the growth of Indian banking, Indian insurance,
Indian merchant shipping, or Indian industries find themselves
faced by the long-established British concerns whose experience
and accumulated resources render them formidable competitors.
In these circumstances, it may seem to them that the ground is
already occupied, and that there can be no room for the growth of
Indian commerce and industry until the British firms which
are already in the field can be cleared out of the way. But
however natural such feelings may be, they might lead, if allowed
free scope, to serious injustice, and partly as a consequence of
this and partly for other reasons they are fraught with grave
danger to the political and economic future of India. We feel
real apprehension as to the consequences which may ensue, if the
present attitude of mutual suspicion and embitterment is allowed
to continue and to grow worse. For this reason we regard it as of
high importance that the attempt should be made now to arrive
at a settlement which both parties can honourably accept/ 1

Imperial Bank of India. With a view to determining
the reforms of the Imperial Bank, a resolution was moved
by Mr. T. N. Ramakrishna Reddi in the Legislative Assembly,
on the 22nd September, 1931, requesting the appointment
of a committee ' to inquire into the working of the Imperial
Bank in all its various branches.' 2 After the recent ex-
haustive banking inquiry, however, a special committee to
report into this question seems hardly necessary.

There is apparently no difference of opinion both the
central banking committee and the foreign experts are
agreed on this point that with the establishment of the
Reserve Bank the Imperial Bank may be relieved of the

1 Despatch of the Government of India on Constitutional Reforms, 1930.
* Legislative Assembly of India Debates, 22nd September, iQ3i, vol. v.,
p. 865.

196 THE MONETARY PROBLEMS OF INDIA

restrictions and Governmental control already indicated, in
order to enable it to function as an ordinary commercial bank.

A point, however, of some importance which does not
appear to have arrested public attention, is the top-heavy
administration of the bank. Considerable savings can be
effected if, for instance, the bank has only one permanent
head office instead of three as at present in Bombay, Calcutta
and Madras. Which ever centre is selected, there is bound
to be some opposition from vested interests in other centres,
but this is a matter of public importance which should be
decided by the legislature, when the constitution of the
Imperial Bank Act next comes up for revision.

Savings, Investment and Stock Exchange. The develop-
ment of savings and their proper investment is a matter of
great importance to the country, as large savings and
investments with a well-organised stock exchange form the
essence of a true money market. To this end, therefore,
no efforts should be spared, and it would be desirable for
India to have, like England and America, investment trusts
which will enable the middle-class investors to secure safe
investments at fair profit.

Reserve Bank. It is now clear how the various constituents
of Indian banking need to be reformed and developed, but
they also need to be centralised and co-ordinated. At
present the various financial units are isolated, and form
in the aggregate a mere conglomeration. They must be
integrated with a sense of common interest and responsi-
bility so as to be woven into an organised whole. In other
words, they want a rallying-point in the shape of a Central
Bank, or what the Hilton Young Commission called the
Reserve Bank, which should also manage the currency
system and supervise all monetary activities. Both the
Banking Inquiry Committee and the foreign experts are
agreed in the view that a Reserve Bank should be constituted
without avoidable delay.

THE FUTURE OUTLOOK 197

In this connexion the Sub-Committee of the Round Table
Conference in 1931 remarked as follows: ' We are in favour
of giving to the Indian public the whole power to the extent
they can manage the financial operations of the country . . .
and we are of opinion that the success of the new constitu-
tion depends upon the establishment of a Central Bank
which should be free from any political interference/

Constitution of the Reserve Bank. The nature of the
constitution of the Reserve Bank was not discussed by the
Banking Committee, but its discussion, first by the Hilton
Young Commission and later by the Indian Legislature, has
been already noted in Chapter II. As pointed out by Sir
Arthur McWatters in a recent paper on Indian Finance
and the Federal Plan before the East India Association, ' the
Reserve Bank Bill of 1928 will, of course, require modifica-
tion. The board will now include representatives from the
whole of India and not from British India only. The wider
field of choice will be valuable/

The Reserve Bank should naturally take over all the
business of the Government of India, not only in India but
also in England. To be more precise, it must act as a
banker both to the High Commissioner and the Secretary of
State for India, and relieve the Bank of England of the
work which that institution does at present for the Secretary
of State. Until the Reserve Bank is formed, and even after
its formation, so long as it may desire, the governmental
business in England may well be transacted by the London
office of the Imperial Bank of India.

Bill Market. Among the most important functions of the
Reserve Bank may be mentioned (i) the maintenance of
the currency at par value, and (2) the control of credit and
the rate of interest on short-term credit for trade and
industry. As regards the second task, there is some doubt
as to how far the bank will succeed in the absence of a well-
developed and extensive bill market in the country. The

198 THE MONETARY PROBLEMS OF INDIA

creation of such a market by various means already sug-
gested (p. 184-5) is most desirable. At the same time, in
accordance with the experts' advice, ' the Reserve Bank
should be given the opportunity of making loans and ad-
vances on the security of movable foods, wares and mer-
chandise, besides the warehouse warrants or warehouse
receipts representing the same/ 1

Banking Regulation. Finally, a word may be said in
regard to banking regulation before turning to banking
education. The proposals of the Banking Committee in
the matter of banking legislation have been already set out
at length. But their importance must not be exaggerated.
It is quite true that ' no banking regulations can prevent
unsound management, losses and failures.' 2 Banks or
bankers cannot be made by a mere Act of Parliament.
Careful regulations may be of assistance, but too much
reliance must not be placed upon them.

Banking Education and Research. Coming to banking
education, its importance is not yet fully realised, and needs
to be emphasised. In the beginning of this chapter, while
discussing monetary standards, mention was made of three
requisites viz., a scientific apparatus, adequate knowledge
to use the apparatus and will or goodwill as driving force.
They are essential as much to a monetary standard as to
the complete money market. We have been discussing the
ways in which the existing apparatus of the money market
may be improved. But whatever improvements are devised
they will accomplish nothing if the very knowledge to under-
stand and use them is lacking. The best surgical instru-
ments in the hands of an ignorant surgeon may easily cause
more harm than good. The money market of today is a
very delicate and complicated machinery which requires
most careful handling. But before this can be ensured,
there must be thorough preparation in the way of well-

1 Experts' Memorandum, Indian Banking Committee Report, 1931, p. 652.
* Ibid., p. 657.

THE FUTURE OUTLOOK 199

planned monetary and banking education and research.
The proposed Boards of Economic Inquiry in each province
are, of course, steps in the right direction. But the work
can be greatly supplemented by valuable contributions
which teachers and students ought to make in the various
colleges and universities.

Banking Statistics. But no substantial progress in our
knowledge of the exact position of the money market is
possible without complete and up-to-date statistics. As will
appear throughout this treatise, statistics relating to banks
in India are deficient in several respects. They are not
only inadequate statistics in regard to small joint-stock
banks (with less capital than R. i lakh) and indigenous
banking are non-existent but they are also ill-arranged.
For instance, annual statistics of co-operation in different
provinces relate to varying months of the year instead of
being on a uniform basis. 1 And all statistics are published
so late they are usually two years out of date at the time
of their publication that they lose much of the value they
would otherwise possess.

In the collection and distribution of statistics America
leads the way. The lot of an economic inquirer in India is
no better, and perhaps much worse, than that of his compeer
in England described by Professor Keynes in the following
words: ' In Great Britain, on the other hand, our banks
the Bank of England and the Big Five alike have, until
recently, looked on the economic inquirer as though he were
the policeman in the pantomime who warns the fellow
under arrest that " every thing he says will be taken down,
altered and used in evidence against him/' ' 2

1 They relate in the case of Behar and Orissa to the year ending 3ist
December, and in the case of Bombay and Assam to the year ending
3ist March. The returns for Madras, Bengal, United Provinces, Burma,
Central Provinces and Berar, Coorg and Ajmer-Marwara refer to the year
ending $oth June, while those for the Punjab, Delhi and the North-West
Frontier Province refer to the year ending 3ist July.

2 A Treatise on Money, by J. M. Keynes, 1930, vol. ii., p. 407.

200 THE MONETARY PROBLEMS OF INDIA

For the improvement of statistics India may well follow
the American lead and adopt the recommendations of
Professor Burnett-Hurst, Secretary of the Indian Economic
Inquiry Committee, published in his Minute of Dissent to
that Committee's Report. They have already received the
support of the Royal Currency Commission of 1926 and of
a majority of the Provincial Governments in India.

3. INTERNATIONAL CO-OPERATION.

The preceding pages have been devoted to analysing the
present apparatus of the Indian money market, to examining
the various possible improvements in it, and to seeing how
knowledge must be gained to devise and use new improve-
ments. But even the best apparatus combined with perfect
knowledge of its working will avail nothing if sufficient will
or goodwill is not there. Mere goodwill or co-operation
without a carefully devised apparatus may accomplish little,
but the two togetherareboundtosucceed where either by itself
is likely to fail. And the co-operation must not be national,
but international. In the modern world no country can stand
isolated, the good of all is the good of each.

Just as the best monetary system for a country is one in
which the money markets in different centres work as one
money market of the whole country, so the best monetary
mechanism for the world would be one in which the money
markets of different countries would work as one. In other
words, we should aim at a world money market and an inter-
national monetary standard. These can only be based on
international confidence and goodwill. According to the
Gold Delegation of the League of Nations, ' the fundamental
necessity for the creation of a more effective international
monetary system is the re-establishment, not so much of the
technical processes of monetary interchange, as of the
willingness to use these processes. The working of an

THE FUTURE OUTLOOK 201

international monetary system such as the gold standard
presupposes the interdependence of nations. If, however,
political conditions are such that nations hesitate to commit
themselves to too great interdependence one upon the other,
but impose rigid restrictions upon international trade in their
effort to attain economic self-sufficiency, there will be little
scope foi any international monetary mechanism. We do not
desire to enter into the political aspect of this problem ; but we
do desire to record our conviction that, without some measure
of political settlement leading to renewed confidence in inter-
national economic and financial relations, there can be no
secure basis for the restoration and improvement of world
trade and finance/ 1

Recent months have witnessed supreme efforts towards
the attainment of international action to combat the deep
economic depression which has spread all over the world.
The agreements arrived at between the various European
Powers in conference at Lausanne on war reparations, and
the trade pacts entered into by different members of the
British Empire, may not in themselves satisfy the highest
expectations, but they seem to reflect a general increase of
confidence on the eve of the World Economic Conference,
which may possibly be held in London some time this year
(1933). The exact programme of the conference is yet to be
settled, but its very conception is at least significant of
the intention to seek international remedies for international
ills in the economic sphere.

Thus the salvation of the world from its present financial
difficulties depends above anything else upon the resolute
determination on the part of every country wholeheartedly
to co-operate in the larger interests of all humanity.

India is on the eve of democratic government and she may
make no mean contribution to world recovery and world

1 Report of the Gold Delegation of the Financial Committee, League of
Nations, Geneva, 1932, para. 232.

202 THE MONETARY PROBLEMS OF INDIA

prosperity. But if the first task of India is to promote
international co-operation, the second is to push on her
national interests and take full advantage of the improve-
ment in world conditions which is believed to be imminent.
India cannot afford to rest on her past laurels; she must go
on, or she goes back.

APPENDIX I

ACT NO. IV OF 1927
[PASSED BY THE INDIAN LEGISLATURE.]

(Received the assent of the Governor General on the 26th
March, 1927.)

An Act further to amend the Indian Coinage Act, 1906, and the
Indian Paper Currency Act, 1923, for certain purposes, and
to lay upon the Governor General in Council certain obligations
in regard to the p^lr chase of gold and the sale of gold or sterling.

WHEREAS it is expedient further to amend the Indian Coinage
Act, 1906, and the Indian Paper Currency Act, 1923, for certain
purposes, and to lay upon the Governor-General in Council certain
obligations in regard to the purchase of gold and the sale of gold
or sterling ; It is hereby enacted as follows :

1. (i) This Act may be called the Currency Act, 1927.

(2) It extends to the whole of British India, including British
Baluchistan and the Sonthal Parganas.

(3) It shall come into force on the ist day of April, 1927.

2. In the Indian Coinage Act, 1906,

(a) for section n the following section shall be substituted,
namely :

' ii. Gold coins, whether coined at His Majesty's
Royal Mint or at any Mint established
in pursuance of a proclamation of His
Majesty as a branch of His Majesty's Royal
Mint, shall not be legal tender in British
India in payment or on account, but such
coins shall be received at any Government
currency office and, at any time after the
30th day of September, 1927, at any
203

204 THE MONETARY PROBLEMS OF INDIA

Government Treasury other than a Sub-
Treasury, at the bullion value of such coins
calculated at the rate of 8-47512 grains
troy of fine gold per rupee ' ; and

(6) the word ' and ' at the end of clause (d) of sub-section
(2) of section 21 and clause (e) of that sub-section shall
be omitted.
3. In the Indian Paper Currency Act, 1923

(a) to section 2 after the words ' in this behalf ' the following

shall be added, namely:

' and
" gold bullion M includes gold coin ';

(b) in clause (a) of section n, the words ' or in gold coin

which is legal tender under the Indian Coinage Act,
1906,' shall be omitted;

(c) in section 13

(i) the words ' for gold coin which is not legal
tender under the Indian Coinage Act, 1906,
or ' shall be omitted ; and

(ii) for the figures '11-30016' the figures
' 8-47512 ' shall be substituted;

(d) in section 18

(i) in sub-section (4), the words ' sovereigns,

half-sovereigns ' and the words ' coin and '

shall be omitted ; and
(ii) in clause (a) of sub-section (8), for the figures

' 11-30016 ' the figures ' 8-47512 ' shall be

substituted ;

(e) in section 19

(i) in sub-section (3), the words ' sovereigns, half-
sovereigns ' shall be omitted, and, in the
Explanation, after the word ' sub-section/
the following words and figures shall be in-
serted, namely:

' gold bullion shall be reckoned at the rate
of one rupee for 8-47512 grains troy of fine
gold, and ' ; and

APPENDIX I 205

(ii) in sub-section (5), the words ' coin or ' and the
word ' coin/ where it occurs for the second
time, shall be omitted.

4. Any person who offers for sale to the Governor-General
in Council at the office of the Master of the Mint, Bombay, or
at any other place notified in this behalf by the Governor-General
in Council in the Gazette of India, gold in the form of bars con-
taining not less than forty tolas of fine gold shall, subject to such
conditions as the Governor-General in Council may, by notifica-
tion in the Gazette of India, prescribe, be entitled to receive
payment for the same at the rate of twenty-one rupees, three
annas and ten pies per tola of fine gold.

5. (i) The Governor-General in Council shall sell, to any
person who makes a demand in that behalf at the office of the
Controller of the Currency, Calcutta, or of the Deputy Con-
troller of the Currency, Bombay, and pays the purchase price
in legal tender currency, gold for delivery at the Bombay Mint
at the rate of twenty-one rupees, three annas and ten pies per
tola of fine gold or, at the option of the Controller or the Deputy
Controller, as the case may be, sterling for immediate delivery
in London at an equivalent rate :

Provided that no person shall be entitled to demand an amount
of gold or sterling of less value than that of 1,065 tolas of fine
gold.

(2) For the purpose of determining the equivalent rate applic-
able to the sale of sterling under this section, twenty-one rupees,
three annas and ten pies shall be deemed to be equivalent to
such sum in sterling as is required to purchase one tola of fine
gold in London at the rate at which the Bank of England is
bound by law to give sterling in exchange for gold, after deduction
therefrom of an amount representing the normal cost per tola
of transferring gold bullion in bulk from Bombay to London,
including interest on its value during transit.

(3) The Governor-General in Council shall, from time to time,
determine the equivalent rate in accordance with the provisions
of sub-section (2), and shall notify the rate so determined in
the Gazette of India.

APPENDIX II

ORDINANCE No. VII. OF 1931.

THE following is the full text of the Ordinance to repeal the
Currency Ordinance, 1931, and to regulate sale of gold or sterling
under section 5 of the Currency Act, 1927:

Whereas it is expedient to repeal the Currency Ordinance,
1931, and to resume and regulate sales of gold or sterling under
section 5 of the Currency Act, 1927; It is hereby enacted as
follows :

1. Short Title. This Ordinance may be called the Gold and
Stetling Sales Regulation Ordinance, 1931.

2. Repeal of Ordinance VI. of 1931. The Currency Ordinance,
1931, is hereby repealed.

3. Restrictions on Sales of Gold or Sterling, (i) Notwithstand-
ing anything contained in section 5 of the Currency Act, 1927
(hereinafter referred to as ' the said section '), sales of gold or
sterling under the said section

(a) Shall be completed only by the Imperial Bank of India

(hereinafter referred to as ' The Bank '), at its local
head offices in Calcutta and Bombay;

(b) Shall be made only to branches in Calcutta or Bombay

of banks for the time being recognised in this behalf
by the Governor-General in Council;

(c) Shall be made for financing

(i) normal trade requirements, excluding any

requirement falling under clause (d)\
(ii) contracts completed before the 2ist September,

1931, and

(iii) reasonable personal or domestic purposes ; and
206

APPENDIX II 207

(d) Shall not be made for

(i) financing imports of gold or silver coin or

bullion, or
(ii) liquidating the oversold exchange position of

any bank in respect of any month subsequent

to the month in which the demand for gold

or sterling is made.

(2) Where any demand is made under the said section to the
Controller of the Currency at Calcutta or to the Deputy Con-
troller of the Currency at Bombay, it shall be forwarded forth-
with to the local head office of the Bank.

4. Power to make Rules regulating Sales. The Governor-General
in Council may, by notification in the Gazette of India, make
rules

(a) prescribing conditions as to the amounts of gold or

sterling which may be sold to any recognised bank,
and the procedure regulating the making of demands
for gold or sterling;

(b) prescribing the authorities which may determine if the

conditions imposed upon sales by or under this Ordi-
nance have been satisfied ;

(c) authorising a Managing Governor of the Bank to suspend

the recognition of any bank provisionally, for a period
not exceeding seven days, and regulating the exercise
of such authority; and

(d) generally, to carry out the purposes of this Ordinance.

5. Bar of Jurisdiction. No suit or other proceeding shall lie
in any Court in respect of anything done or in good faith intended
to be done under this Ordinance or the rules made thereunder.

NOTIFICATION

No. D. 6604 F.
Simla, the 2^th September, 1931.

IN exercise of the powers conferred by section 4 of the Gold
and Sterling Sales Regulation Ordinance, 1931 (Ord. VII. of 1931),
the Governor-General in Council is pleased to make the following
rules :

208 THE MONETARY PROBLEMS OF INDIA

1. These Rules may be called the Gold and Sterling Sales
Regulation Rules, 1931.

2. An amount of gold or sterling of less value than 25,000
shall not be sold to any recognised bank.

3. Demands for gold or sterling may be made at the Local
Head Offices of the Bank in Calcutta and Bombay.

4. The Secretary of the Local Board of the Bank at Calcutta
or Bombay, as the case may be, shall be the authority to decide
if any demand satisfies the conditions imposed by the Ordinance
and those Rules; and his decision shall be final.

5. (i) A Managing Governor of the Bank may call upon any
recognised bank to satisfy him

(a) that it has not been selling foreign exchange for any

purpose other than those specified in clause (c) of
subsection (i) of section 3 of the Ordinance, or for any
purpose specified in clause (d) of that subsection, and

(b) that it has been using all its purchases of foreign exchange

before making a demand on the Bank for gold or
sterling.

(2) If such Managing Governor is not so satisfied, he may
suspend the recognition of the bank for a period not exceeding
seven days.

(3) A Managing Governor shall make a report immediately
to the Governor-General in Council of any action taken by him
under this rule.

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BASTER (A. S. J.): The Imperial Banks. London, 1929.

BRIJ NARAYAN : Indian Economic Life Past and Present. Lahore,

1929.
BROWN (J. C.): India's Mineral Wealth ("India of Today").

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CALVERT (H.) : The Law and Principles of Co-operation. Calcutta,

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CANNAN (E.): Money. London, 1929.
CANNAN (E.) : Modern Currency and the Regulation of its Value.

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DARLING (M. L.) : The Punjab Peasant in Prosperity and Debt.

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Encyclopedia Britannica. I4th edition, 1929.
GREGORY (T. E.): The Return to Gold. London, 1925.
GREGORY (T. E.): The Gold Standard and its Future. London,

1932.

HAWTREY (R. G.) : Currency and Credit. London, 1930.
Indian Annual Register, 1923 and subsequent years. Edited by

H. N. Mitra, Calcutta.

Indian Finance Year Book. Calcutta, 1932.
Indian Year Book, 1925 and subsequent years. Bombay.
; JATHER (G. B.) and BERI (S. G.): Indian Economics. 2 vols.

Oxford University Press, 1931.
KALE (V. G.) : Indian Economics. Poona, 1927.
KEYNES (J. M.): A Treatise on Money. 2 vols. London, 1930.
KISCH (SiR CECIL H.) and ELKIN (W. A.): Central Banks.

London, 1932.
KNOWLES (L. C. A.) : The Economic Development of the British

Empire. London, 1928.

PILLAI (P. P.) : Economic Conditions in India. London, 1925.

209 14

210 THE MONETARY PROBLEMS OF INDIA

POWELL (E. T.): The Evolution of the Money Market (1385-1915).

London, 1916.
Reports (and Memoranda) of the Gold Delegation of the Financial

Committee, League of Nations. Geneva, 1932.
SALTER (Sm ARTHUR): Recovery. London, 1932.
SAP RE (B. G.) : Essentials of Indian Economics. 1927.
SPALDING (W. F.): The Eastern Exchange Currency and Finance.

London, 1924.

SPALDING (W. F.) : London Money Market. 1930.
Stock Exchange Official Intelligence. 1932.
WADIA (P. A.) and JOSHI (G. N.) : The Wealth of India. London,

1925-
World Economic Survey, 1931-32. League of Nations, Geneva,

1932.

B. RECENT BOOKS ON THE INDIAN MONEY MARKET. 1

AMBEDKAR (B. R.): The Problem of the Rupee. London, 1922.
BHATNAGAR (B. G.): Currency and Exchange in India. Allaha-

bad, 1924.
CHABLANI (H. L.) : Indian Currency and Exchange in India.

Madras, 1929.
CHABLANI (H. L.): Studies in Indian Currency and Exchange.

London, 1931.

CLARKE (Sm G. R.): The Post Office of India. London, 1921.
COYAJEE (Sm J. C.) : The Reserve Bank of India. Madras, 1927.
COYAJEE (SiR J. C.): The Indian Currency System (1835-1926).

Madras, 1930.
DADACHANJI (B. E.): A Reserve Bank for India and the Money

Market. Bombay, 1931.
DADACHANJI (B. E.): History of Indian Currency and Exchange.

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DUBEY (D. L.) : The Indian Public Debt. Bombay, 1930.
GUPTA (B. B. D.): Paper Currency in India. Calcutta, 1927.
HOUGH (E. M.): The Co-operative Movement in India. London,

1932.
Indian Currency and Exchange (1914- 1931)- Published by the

Federation of Indian Chambers of Commerce and Industry,

JAIN (L. C.) : Indigenous Banking in India. London, 1929.

1 With a few important exceptions the books included in the list are all
those published within the last ten years, 1922-1932.

BIBLIOGRAPHY

JEVONS (H. S.) : The Future of Exchange and Indian Currency.

London, 1922.
JEVONS (H. S.) : Money Banking and Exchange in India. Simla,

1922.
KALE (V. G.): India's War Finance and Post-War Problems.

1921.

^KEYNES (J. M.): Indian Currency and Finance. London, 1913.
MADAN (B. F.): India's Exchange Problem. 2 vols. 1925.
MAHINDRA (K. C.) : Indian Currency and Exchange. 1922.
RAU (B. R.) : Present-Day Banking in India. Calcutta, 1030.
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RUSHFORTH (F. V.): Indian Exchange Problems, 1920. Madras,

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SHIRRAS (G. F.) : Indian Finance and Banking. London, 1920.
SINHA (H.) : Early European Banking in India. 1927.
STRICKLAND (C. F.) : Introduction to Co-operation in India (" India

of Today "). Bombay, 1922.

THAKUR (B. T.) : Organisation of Indian Banking. Calcutta, 1929.
TURLE (H. B.): An Outline of Indian Currency. Calcutta, 1927.
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India. Bombay, 1927.

WACHA (D. E.) : Paper Currency in India. 1927.
WADIA (P. A.) and JOSHI (G. N.): Money and the Money Market

in India. London, 1926.
WOLFF (H. W.): Co-operation in India. London, 1927.

C. OFFICIAL AND OTHER PUBLICATIONS.

All-India Income Tax, Report and Returns for the year 1930-31.
Annual Report of the Indian Posts and Telegraphs Department for

the year 1930-31.
Annual Report of the Working of the Joint-Stock Companies,

1925-26.
Annual Report on the Administration of the Indian Companies Act,

79/9, etc., in Bengal for 1930-31.

Banking Needs of India. Pamphlet by Mohan Lai Tannan. 1919.
Budget (Annual).
Census of India. 1921, 1931.
Gazette of India, January 14, 1931; September 21 and 24, 1931.

212 THE MONETARY PROBLEMS OF INDIA

Government Securities Manual, 1921 (with latest corrections).

Index Numbers of Indian Prices, 1860-1930.

India in 1925-26 to 1930-31. (Annual.)

Indian Year-Book, 1931 and 1932.

Investors' Indian Year Book, 1931-32.

Legislative Assembly Debates, India (Official Report).

Mints Report for Calcutta and Bombay. (Annual.)

Moral and Material Progress of India, 1911-1912.

Post and Telegraph Guide, 1932.

Prices and Wages in India. (Annual.)

Proceedings of Federal Structure Committee. Indian Round Table
Conference (Second Session), 1932 (Cmd. 3778).

Report of the Controller of the Currency. (Annual), 1920-21 to
1931-32.

Report of Committee on Industry and Finance. London, 1931
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Report of the External Capital Committee, 1925.

Report of the Indian Chambers of Commerce, Calcutta, for 1930.

Report of the Indian Economic Inquiry Committee, 1925.

Report of the Royal Commission on Agriculture in India, 1928.

Reports and Evidence of the (Herschell) Committee on Indian
Currency, 1893 ; the (Fowler) Committee on Indian Currency t
1898; the (Chamberlain) Royal Commission on Indian Finance
and Currency, 1913 (Cmd. 7236 of 1914); the Babington
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(Cmd. 527 of 1920); the (Hilton Young) Royal Commission
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Reports and Evidence of the Indian Central Banking Committee, 1931 ,
and of the Banking Inquiry Committees in various Prov-
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Reports of the Annual Conference of the All- India Economic Associa-
tion, 1926 onwards.

Reports of the Conferences of Registrars of Co-operative Societies.

Reports on the Working of the Co-operative Societies in the various
Provinces of India.

Statesman's Year-Book, 1932.

Statistical Abstract for British India, 1931-32,

Statistical Statements relating to Co-operative Movement in India.
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Statistical Tables relating to Banks in India. (Annual.)

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D. MISCELLANEOUS.

Bankers' Magazine, September 1926: ' Indian Currency and

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Capital, 1931 and 1932.
Commerce, 1931 and 1932.
Despatch of the Government of India on Constitutional Reforms ,

1930.
Economica, October 1921 : ' The Indian Currency Report/ by

A. R. Burns.
Extract from the Proceedings of the Punjab Government (Ministry

of Agriculture), No. 322 D, dated the 29th January, 1932.
Government Order No. 374, Government of Madras, dated

I2th March, 1932.
Parliamentary Papers, 148 of 1864.
The Calcutta Stock Exchange Association, Ltd. : Reports and

Accounts for the year ended 3oth September, 1931, 1932.
The Times, London, 1932.

INDEX

AGHA moneylenders, 58

Agriculture: some of its needs, 159;
rural credit, 159; rural indebted-
ness, 160, 167; Royal Commission
on (1928), 81 n., 156, 159, 161, 168,

J 74

Agricultural Loans Act (1884), 85, 86

Agricultural Tribunal of Investiga-
tion, 159

Agriculturists' Loans Act, 178

Ahmadabad, 122

Ajmer-Marwara, 57, 74, 79, 103,
199 n. 1

Akalkote, 157 w. 3

Akyab, 179 n.

All-India Bankers' Association, 185

All-India Co-operative College, 186

Allahabad Bank, 98, 102, 193

Allahabad University, 124

American Express Company, 105

Amritsar, 108

Anstey, Dr. (Mrs.) Vera, vii

Assam, 57, 58 w. 6 , 74, 79, 81, 85-7,
103, 118, 157 n., 161, 199 n. 1

Atith moneylenders, 58

Atlay Committee, 144

Aundh, 157 w. 3

Babington Smith Committee, 12, 13,

23

Bagla, Lala Rameshwar Prasad, 38
Bahikhata (account book), 61
Baluchistan, 101, 103, 203
Bangalore, 101
Bank of Baroda, 98, 193
Bank of Bengal, 16 n., no, in
Bank of Bombay, 16 n. t 88, no, in
Bank of Chettinad, 61
Bank of India, 89, 98, 99, 148, 193
Bank of Madras, i6w., no, in
Bank of Mysore, 89, 98
Bank of Upper India, 90
Bank rate, 36, 37
Bankers' bank, 117, 120
Bankers' Evidence Act, 65, 171
Bankers, Indian Institute of, 125,

1 86

, Bankers' Magazine, 37 n.
Banking, see Imperial Bank of India ;

Indigenous bankers; Joint-Stock

banks
Banking Committee Report. See

under Indian Banking Committee

Report

Banking education, 124, 186, 198
| Banking inquiry (1929-31), 155-86,

196
Banking reform, 191-200; suggested

legislation, 179, 198; statistics,

186, 199

Baroda, 103, 157 n. 3
Baroda, Bank of, 98, 193
Bassein, 179 n.
Baster, A. S. J., 108 w. 1
Bearer Bonds, 134, 135
Behar and Orissa, 58 w. 4 , 60 n, 1 , 74,

79, 81, 83, 86, 87, 101, 103, 118,

157 n., 161, 163 ., 183, 199 n. 1
Benami loans, 162
Bengal, 57, 58 n. 5 , 62, 67, 68, 69 n. 1 ,

74, 79, 80 w., 81, 85, 86, 101, 103,

118, 157 n., 163 n,, 199 n. 1
Bengal, Bank of, i6w., 110, in
Berar, 101, 199 w. 1
Better Living Society, 75
Bhalla, Shadi Lai, viii
Bhopal, 157 . 3
Bijapur, 178
Bikaner, 157 w. 3
! Bill market, 108, 185, 197
Bills: Council, 9, 16; Reverse

Council, 9, 10 n., 14, 15; Supply,
| 114; Treasury, 39, 40, 135-7;
I stamp duties on bills, 185
i Bills of exchange, see Hundis
j Bimetallic standard, 4 n., 188
Blackett, Sir Basil, vii, 26, 32, 32 n.,

' 157

Blunt, Hon. E. A. H., vii
Bombay, 17, 109, in, 122, 127, 196
Bombay, Bank of, 16 w., 88, no, in
Bombay loans, 143

j Bombay Merchants' Bank, 89

i Bombay Mint, 34, 205

215

216 THE MONETARY PROBLEMS OF INDIA

Bombay Presidency, 56 w. 3 , 57, 58,

61, 63, 74-6, 80, 81, 84, 86, 100,

101, 103, 118, 127, 145, 157 n., 161,

163 w, 172 w., 178, 179 M , 199 w. J

Bombay Shroffs' Association, 58, 59

Bombay Stock Exchange, 143-51,

1 66

Bombay University, 124
British competitors, 195
Budget position (1931-32), 39
Bundelkhand Land Alienation Act,

65

Burma, 17, 57-9, 61-3, 65, 66 n. t 72,

74, 78, 79 n., 81, 83, 86, 100, 101, !

103, 118, 157 ., 199 w. 1 |

Burnett-Hurst, Professor, 200 j

i
Calcutta, 17, 62 n., 109, in, 122, |

127, 135, 179 ., 196 |

Calcutta Banking Corporation, 105
Calcutta loans, 143
Calcutta Stock Exchange, 143, 151-

153. 1 66

Calvert, H., 72 n. 1 , 78 I

Cannan, Prof. E., 8, 8 ., 29 n? \
Capital, 17 w. 6 , 162 w. 2
Cash Certificates, 130, 135, 137, 1 66, |

183

Cassel, Prof. Gustav, 189, 190 w.
Cassels, G. C., 157 w.
Cawnpore, 17, 122
Central Areas, 60 n. 2 , 65 w. 3 , 103,

157 w.2, 163 n.
Central Bank, 2 n., 24, 31, 32, 116,

117, 196, 197

Central Bank of India, 89, 98, 193
Central Banking Inquiry Committee

Report (ig^i), $6 n. 2 , 105 n., 129 n.-

157 w. 1 , 158, 160, 166 n., 167 n.,

184 n.
Central Provinces, 57, 58 w. 2 , 67 n. 2 ,

74, 78, 81, 85, 100, 101, 103, 118,

157 n., 161, 199 w. 1
Ceylon, 1 1 8, 122
Chablani, H. L., n w. 1 , 18 w. 1
Chamberlain, Neville, 47 n. 2 , 190
Chambers of Commerce, 59, 156, 158
Chartered Bank of India, Australia

and China, 105, 107
Cheques (of indigenous bankers),

60, 61; bearer, 179
Chettiars (bankers), 57, 5 9, 61,63, 65
Chettinad, Bank of, 67
Chetty, R. K. Shanmukham, 46
Chinese moneylenders and pawn-
brokers, 65, 66
Chit Funds, 68-70
Chithas (pass-books), 60 n.

Choksis (pawnbrokers or gold

smiths), 58

Clarke, Sir Geoff rey R., 127 n. t 128 n.
Clearing houses, 122
Cochin State, 103
Coinage Acts (1835), 3-5; (1906^

30, 203, 204
Colombo, 122
Companies Act, 1913 (Indian), 103,

123, 124
Cook, Thomas, and Sons (bankers),

105

Co-operative credit societies, 65,
71-85; co-operative machinery,
72; Central Bank, 72; Provincial
Bank, 73; rates of interest, 73;
general progress (1926-32), 74;
progress made in the Provinces,
74; the Punjab, 75; Bombay,76;
Madras, 76; United Provinces, 77;
Central Provinces, 78 ; Burma, 78 ;
North -West Frontier Province,
79; Behar and Orissa, 79; effect
of the recent depression, 80;
inadequacy of the movement, 80;
causes of slow progress, 82; land
mortgage banks, 82-5, 163, 168,
174-7; defects of co-operation,
162; suggested remedies, 171-4,
192

Co-operative educational institutes,
186

Co-operative Hindustan Bank, 89

Co-operative Societies Act (1912),
172, 173, 181

Coorg, 79, 81, 199 n. 1

Council Bills, 9, 16

Cox and Company (bankers), 107

Coyajee, Sir J. C., 5 n. 2

Credit Bank of India, 90

Credit control, 23-5, 197

Credit Lyonnais, 194

Cunliffe Committee, 12

Currency Act (1927), 33-6, 203, 206

Currency and Prices in India, 5 n. 2

Currency Committee Report (1919),
19 w.

Currency Ordinance (1931), 41,
206-8

Currency, Report of Controller of,
18 w. a , 20 n., 21 n., 38 n. t 39 w.,
40 w.,5ow., in n. 4 , 113 w. 2 , 118 n.,
ugn.,i2in., 131 n., 136*1., 137*1.,
140 n., 141 n.

Currency, Royal Commission on
Indian (1926), 15, 16 n., 20 n.,
22-33, 45 n - 1 ' I1 9 n -> 12 n -> J 56,
183, 200

INDEX

217

Currency system : before 1916, 2-10;
silver standard 2-7; token cur-
rency, 8 ; the two - currency
system the silver rupee and the
gold pound, 9; currency system
(1916-25), 10-21; main defects of
the currency system, 22-4; two-
token currency system, 22; paper
currency reserve and gold stan-
dard reserve, 23, 30; inelastic
currency, 24; emergency cur-
rency, 24; a Central Bank to
control credit, 24; the gold j
bullion standard scheme, 25-30,
187; proposed currency and bank-
ing legislation (1927), 30; Re-
serve Bank Bills (1927 and 1928),
30-2; the sterling exchange stan-
dard, 35, 41-8; currency con-
troversy (1926-31), 36-9; cur-
rency crisis (1931), 39-41; mone-
tary reform, 187-91; alternative
standards to gold, 188; proposed
currency board, 190; see also
Paper currency

Currency Transfers, 114

Currie, B., 157 w. 4

Dadan (credit by word of mouth), 02
Dalhousie (Lord), 5
Debt, Internal and External, 136
Delhi, 57, 59, 74, 79, 81, 101, 103,

122, 199 n. 1

Deposit-banking, 60, 61
Desai, B. J., 144
Deutsche Bank, 194
Dhar, 157 w. 3
Dholpur, 157 w. :l
Double pice, 4

East India Company, 3

East India Cotton Association of

Bombay, 44
Eastern Bank, 105, 107
Economic depression, 39, 201
Economic Inquiry Committee, 200
Education, banking, 124, 186, 198
Eight-anna nickel piece, 8 n.
Elkin, Miss W. A., 31 n. 1 , 32 n 2 .
Exchange: evolution of the ex-
change standard (1898-1916), 8-
10 ; the sterling exchange stan-
dard (1898-1916), 10 ; the silver
exchange standard replaces ster-
ling (1916), ii ; the rupee linked
to gold (1920), 12; management
of exchange (1920-25), 15; main
defects of the exchange system,

22; gold bullion standard scheme,
25-30, 187; sterling exchange
standard, 34, 35, 41-8, 54; weak-
ness of exchange (1927-31), 36-8;
unsatisfactory exchange position
(1931)1 4.* alternative standards
to gold, 188-91
Exchange banks, 104-9, 165, 181,

193

Exchange Banks' Associations, 109
Exchange Brokers' Associations,

109
Exports (1916-19), n w.; (1929-32),

49. 52-4

External Capital Committee, 155
External debt, 136

Famine Commission (1901), 178
Famine Insurance and Relief Funds,

137 w 3 .

Federal Structure Committee Pro-
ceedings (1932), 42 n., 43 n.

Fiduciary issue, 16, 18, 19, 29, 30

Fifteen-rupee gold piece, 4

Finance and Currency, Royal Com-
mission on Indian (1914), 155

Finance and Industry, Report of
Committee on (1931), 25 w. 1 , 29 n*

Five-rupee gold piece, 4

Four-anna nickel piece, 8 n.

Fowler Committee, 8

Friederich, Dr. A., 158 n.

Gazette of India, 33 w. 1 , 41 ., 42 w. 2 ,

57 n -

Goa, 103

Gold . coins deprived of legal tender,
3, 4, 34, 203; and Gresham's law,
4; demonetised, 5; the movement
for gold currency, 5, 6; gold
prices (1852-92), 6; gold standard
with gold currency, 8; use of the
gold pound, 9; the rupee linked
to gold (1920), 12; gold standard
reserve, 2, 3, 30, 53; gold bullion
standard .scheme, 25-30, 187;
sale and purchase of gold (1927),
34,203-8; gold exports (1931-32),
49-54; gold standard ceases to
function, 187; essential precedents
to a restoration of the gold stan-
dard, 189

Gold and Silver Coinage Act (1835),

3-5
Gold and Sterling Sales Regulation

Ordinance (1931), 42, 51, 54, 206-8
Gold Delegation of the League of

Nations, 189, 190 n., 200, 201 n.

218 THE MONETARY PROBLEMS OF INDIA

Gold Standard Act (1925), 27, 29
Gold Standard and its Future, 12 n, 1
Gold Standard and Reserve Bank

of India Bill (1927), 30
Goldsmiths, 58
Gossain moneylenders, 58
Government deposits, 117
Government securities, see Loans
Government Securities Manual, 135 n.
Gray, R. A., vii
Gregory, Prof. T. E., vii, 2 w. 3 , 12 n. 1 ,

26 n.

Gresham's law, 5
Grindlay and Company (bankers),

108

Gujratis (bankers), 61
Gupta, Dr. B. B. Das, 5 n 2 , 17 n l
Gurwala, Lala Shrikrishna, 59
Gwalior, 103, 157 n.' 3

Hailey College of Commerce, 124

Haji, N. S., 156

Half-pice, 4

Half-rupee (silver), 3, 34; (nickel), 8

Hapur, 65

Haque, S. A., 148 n.

Haria moneylenders, 58

Hathras, 65

Hath-udhar (credit by word of

mouth), 62

Henderson, Mrs. A., vii
Herschell Commission (1892), 7
Hundis or trade bills, 24, 55, 60, 179,

i8 5

Huson, Tod and Co., 154
Hyderabad, 103, 157 n. A

Imperial Bank of India, 2 n., 19,
23-5. 3i, 36, 37. 43, 61, 64, 65,
73, 102, 135, 156, 193, 206; first
banking amalgamation, no;
capital and reserve, no; consti-
tution and management, 1 1 1 ;
kind of business, 112; London
branch, 113; obligations and
privileges, 113; resources, 114;
balance sheets, 115; its consti-
tution, position and functions, 1 1 6,
117; Government deposits, 117;
branches, 118, 119; inland re-
mittances, 119; its relations with
the joint-stock banks, 120; clear-
inghouse business, 122; Imperial
Bank of India Amendment Bill
(1927), 122; and credit and over-
draft facilities to co-operative
societies, 1 73 ; improvements
needed, 166, 167, 195; and the

financing of foreign trade, 182;

recommendations of the Banking

Committee, 182

Imperial Bank of India Loan, 138
Imperial Banks, 108 n. 1
Imports (1916-19), n n.; (1929-32),

49. 52"4

India, Bank of, 89, 98, 99, 148, 193

Indian Bank, 89

Indian Bank, Ltd. (Madras), 98

Indian Banking Committee Report
(1931), 72 w. 2 , 73 n., 83 n, 1 , 85 n.,
86 n., 87 n., 103 n., 107 n. 1 , 109 n.,
112 n., 122 n., 123 n., 124 .,
160 n.' 2 , 161 n., 162 n. 1 , 165 n.,
166 n., 167 n. 2 , 170 n., 174, 175 n.,
198 n.

Indian Currency and Exchange,
n n. 1 , 99 n."

Indian Currency System, 5 w. 2

Indian Finance Year Book, 48 n.,
51 n., 52 n.

Indian Specie Bank, 90

IndianY ear Book, ion., n n , 12 n*,
97 n.

Indigenous bankers and money-
lenders: the distinction between
bankers and moneylenders, 55;
their numbers, geographical dis-
tribution, and classification, 56-8;
interconnexion between bankers
and moneylenders, 58; modern
associations, 59; functions of
moneylenders and indigenous
bankers, 59; methods, 60-2;
distinction between bankers and
moneylenders and modern banks,
63 ; their relations with the joint-
stock banks, 63; decline of in-
digenous banking (1926-32), 64;
difficulty in regard to loan re-
payments, 64; competition of
other credit agencies, 65; re-
lationship between bankers and
moneylenders and borrowers, 66;
changing methods, 67; control
and reform of moneylenders'
activities, 168-70; the money-
lender's grip over the cultivator,
161; reorganising the bankers,
t i6i, 170, 192

Indigenous Banking in India, 3 n. 1 ,
24 w. 2 , 55 n. 1 , 62 n. 2 , 63 w. 2 , 87 w. 2 ,
105 w. 1 , 192 w. 1

Industrial Commission (1918), 155
Institute of Bankers, 125, 186
Insurance facilities offered by the
Post Office, 133

INDEX

219

Interest rates, charged by pawn-
brokers, 62; loan offices, 68, 69;
Nidhis, 70; co-operative credit
societies, 73, 172; agricultural
loans, 86; Post Office Savings
Bank, 129; Post Office Cash
Certificates, 130; Government
loans, 131, 141

Intermediates, 16

Internal debt, 136

International monetary system,
200

International Settlements, Board
of the Bank for, 189

Investment trusts, 196

Investors, 55

Investor's Indian Year Book, 139 n.,
140 M.

Jain, Sumer Chand, viii

Jain bankers, 59

Jeidels, Dr. O., 158 n.

Jodhpur, 157 w. 3

Joint-stock banks, 88-126; capital
and reserve, 88; bank failures,
90, 94, 99-102; capital reserve,
deposits and cash balances, 91-7;
summary of balance sheets, 97;
dividends, 98 ; proportion of cash
to liabilities, 99; geographical
distribution of banks, 102 ; banking
legislation, 103; resources com-
pared with those of banks of the
United Kingdom, 126; some
defects, 164; Banking Committee
recommendations, 178; suggested
reforms, 193

Kabuli moneylenders, 58

Kachcha moneylenders, 58

Kalhdaikurichi Brahmans (bank-
ers), 6 1

Kamrup, 85

Kandu loans, 62

Karachi, 17, 109, 122, 179 n.

Karachi loans, 143

Kashmir, 103

Kathiawar, 103

Keynes, J. M., 89 n., 99 n. z , 189, 199

Kharegat, Mr., 82

Khurja, 65

King, Henry S., & Company
(bankers), 108

Kisch, Sir Cecil H., 31 n, 1 , 32 n. z

Kolhapur, 157 w. 3

Kommanditgesellschaft auf Aktien,
169 w. a

Kuries (Chit Funds), 70

Lahore, 17, 108, 122

Lai, Manohar, vii

Land Alienation Acts, 176, 177

Land Improvement Loans Act
(1883), 85, 86

Land mortgage banks, 82-5, 163,
168, 174-7

Lausanne agreement, 201

Law and Principles of Co-operation,
72 w. 1

Legislative Assembly Debates, 30 . 3 ,
33 w.2, 38 w. 5 , 46 n. 2 , 47 n. 1 ,
156 n.

Lloyds Bank, 107, 108

Loans by indigenous bankers and
moneylenders, 61, 64, 67; by
pawnbrokers, 62; loan offices,
Nidhis, and Chit Funds, 68-70;
co-operative credit societies, 71,
171, 172; land mortgage banks,
82-5, 163, 168, 175; state loans
to agriculturists, 85 ; takavi loans,
87, 177; Government loan opera-
tions, 134-42; fall in the prices of
securities, 140; prices of Govern-
ment securities in recent years,
150, 152; loan operations of
public bodies, 142; Benami loans,
162

Lucknow University, 124

McDougall, A. P., 158 n.

Maclagan Committee (1915), 71

Macmillan Committee, 25, 30 n.

Maconochie, James, & Co., 154

McWatters, Arthur, 197

Madras, 17, 127, 196

Madras, Bank of , 16 w., no, in

Madras loans, 143

Madras Presidency, 57, 59 n., 61,
62, 67, 69, 70, 72, 74-7, 81, 84,
86, 87, 101, 103, 109, in, 118,
122, 127, 157 n.' 2 , 161, 199 n. 1

Madras Stock Exchange, 143, 153

Mansfield Commission (1866), 5

Marwari Association, 59

Marwari Chamber of Commerce, 59

Marwaris (bankers), 59, 61

Mehkar, 85

Mercantile Bank of India, 105, 107

Methods and Machinery of Invest-
ments in India, 148 n.

Military moneylenders, 58

Mitra, Sir Bhupendra Nath, vii,

158
Modern Currency and Regulation of

its Value, 8 n. 2
Moghul moneylenders, 58

220 THE MONETARY PROBLEMS OF INDIA

Mohur (gold coin), 4

Money, see Currency system

Money, 8 n. 1 , 29 n.%

Moneylenders, see Indigenous bank-
ers and moneylenders

Money market, its meaning, i , its
constituents, i ; its nature, 2 ;
its deficiency, 167; highly dis-
organised and ill-developed, 187;
international co-operation, 200-2 ;
see also Currency system

Moral and Material Progress in
India, ij n.*

Morsi, 85

Moulmein, 179 n.

Multani Bankers' Association, 59

Multanis (bankers), 61, 63

Munims (agents), 58, 59 n.

Murajan, S. K., 5 w.

Mysore, 101, 103

Mysore, Bank of, 89, 98

Naga moneylenders, 58
National Bank of India, 105, 107
National Provincial Bank, 107
National Savings Associations, 183
Native Share and Stock Brokers'

Association, 143, 144
Nattukottai Chettis (bankers), 59 n.,

61, 63

Negotiable Instruments Act, 179
New Delhi, 108
Nickel coins, 8 n.
Nidhis, 68, 69
North -West Frontier Province, 57,

74, 79, 81, 101, 103, 118, 199 n. 1
Notes, see Paper currency

Oakden Co-operative Committee's

report, 77, 78 w.
One-eighth rupee, 3
Orcha, 157 n. 3

P. & O. Banking Corporation, 105,
107

Pakka moneylenders, 58

Panchayat (Association), 59, 66, 172

Paper currency: Government as-
sumes sole right of issuing (1861),
4, 16; universal notes, 6, 17;
fiduciary issue, 16, 18, 19, 29, 30;
circles of issue, 17; lack of elas-
ticity, 17; paper currency during
the War, 18 ; circulation (1913-20),
18; (1920-25), 20; paper currency
reserve, 18, 19, 20, 23, 136; emer-
gency paper currency, 19; decline
in encashment of foreign circle

notes (1920-25), 20; contractic-
of note currency (1926-31), 38
Paper Currency Acts (1861), 16;
(1923), 19, 30, 203, 204;

Paper Currency in India, 5 w. 2 , 17 n. 1
Paper standard based on price in-

dex numbers, 188, 189
Pass-books (of indigenous bankers),

60, 61

Pathan moneylenders, 58, 170
Patiala, 157 n.' 3
Pawnbrokers, 58, 62
People's Bank, 90
People's Bank of Northern India,

126

Petit, Sir Dinshaw, 143
Phaltan, 157 n.' A
Pice, 4
Pie, 4

Porbandar, 157 w. a
Post Office of India and its Story,

127 n.
Post Offices origin and develop-

ment, 127; savings banks, 127-30,

137, 183; as bankers and stock-

brokers, 128; Cash Certificates,

130, 135, 137, 166, 183; purchase
and sale of Government securities,

131, 183; insurance facilities and
fund, 133; improvements needed,
166, 183

Powell, Ellis T., 194 n.
Presidency Banks, 16 n. 2 , no, 112,

113, 127
Prices, index number of prices in

Calcutta and Bombay (1928-32),

48,49

Promissory notes, 134, 135
Provident fund, 137, 138
Provincial balances, 136, 137
Provincial banks, 171, 173
Provincial Board of Economic

Inquiry, 167

Provincial Co-operative Bank, 176
Provincial Land Mortgage Corpora-

tion, 176

Pudukottah, 157 n*
Punjab, 63 w. 3 , 66, 72, 74, 75, 70 n.,

80, 81, 82 n., 83, 86, 87, 100-3,

118, 157 n. 2 , 161, 192, 199 w. L
Punjab and Sind Bank, 89
Punjab National Bank, 98, 193
Punjab Regulation of Accounts Act

(1930), 168, 169
Punjab University, 124

Qistbandi loans, 62

INDEX

221

stias (moneylenders), 58 j

Juarter-rupee, 3 I

Railways, 137, 138
Raj pu tana, 103 j

Rangoon, 17, 59, 109, 122, 179 w \
Rangoon loans, 143 ,

Ratlam, 157 w. 3 j

Reddi, T. N. Ramakrishna, 195 '

Reed, Sir Stanley, 13 w. !

Remittances, inland, 119, 121 '

Reserve (gold standard), 23, 30, 53; |

(paper currency), 18-20, 23, 30, |

136 I

Reserve Bank, 24, 28, 30-2, 52, 122,

124, 156, 170, 171, 173, 178, 179,

181, 182, 184-6, 195-8
Reserve Funds, 137
Reserve Treasuries, 119
Return to Gold, 2 w. 3 , 26 n.
Reverse Council Bills, 9, 10 n., 14,

Rohilla moneylenders, 58

Round Table Conference (1931),
197

Rozai (day to day loans), 58

Rupee: a silver coin of unlimited
legal tender, 3, 29, 34 ; under the
silver standard, 3 ; fall in its value
(1872-92), 6; departs from the
silver standard (1893), T> rated at
is. 4d., 7, 8; becomes token, 8;
its stabilisation (1898), 9; silver
standard replaces the sterling
standard (1916), n; a 2s. rupee
linked to gold (1920), 12-14;
rated at 2s. sterling (1920), 15;
restored to is. 4d. sterling (1923),
15; at is. 6d. sterling (1924-25), I
16; basis of its stability, 22, 23;
its parity under the gold bullion i
standard (1925), 27; parity of '
exchange (1927), 34; linking the
rupee to is. 6d. sterling, 36-
48

Rural Insolvency Act, 168

Sarma, Sir B. N., 155

Sarrafs, see Shroffs

Savanur, 157 w. 3

Savings banks, Government, 10,

127; district, 127; Post Office,

127-30, 137, 183
Savings certificates, 29, 183
Schuster, Sir George, 38, 47 n. 1 ,

c, I4X ' 157

Securities, Government, see Loans

Shirras, G. F., 89 ., 90 n.

Shroffs (sami/s), 58, 59

Silver prices (1916-20), 6, 11-14

Silver standard 2-5, 188; silver
slump (1872-92), 6; departure
from silver (1893), 7; reintro-
duced (1916), ii

Simla, 122

Sindh, 63, 103

Slater, Dr. Gilbert, vii

Son thai Parganas, 203

Sovereign, 22

Spalding, W. F., 194

Standard Bank of Bombay, 90

Statistical Tables Relating to Banks
in India, 88 n. t 89 n., 90 w. 1 , 91 .,
94 n., 95 n., 99 ., 105 n., 114 n.

Stephen and Co., 154

Sterling exchange standard, 10, IT.
34, 35, 41-8, 54, 188

Stock-brokers, Post Office as, 128

Stock certificates, 134, 135

Stock Exchange Official Intelligence,
142 n.

Stock Exchanges Bombay Stock
Exchange, 143; Inquiry Com-
mittee (1923), 144; membership
and members' conduct, 145; de-
faulters, 146; kinds of members,
147; methods of business, 147;
kinds of clients, 148; clearing
house, 148; holidays, 148; oper-
ations (1927-32), 149; business
suspended (1930), 149; Govern-
ment securities market, 150;
Calcutta Stock Exchange, 151-3;
Madras Stock Exchange, 153;
Stock Exchange improvements
needed, 166, 184, 187, 196

Strickland, C. F., 79

Subedar, Manu, 159

Supply bills, 114

Swadeshi movement, 88, 102

Sydenham College of Commerce, 1 24

Sylhat, 85

Takavi loans, 87, 177
Telegraphic Transfers, 16
Tenancy Acts, 176
Ten-rupee gold piece, 4
Thakurdas, Sir Purshotamdas, vii,

24 w. 3 , 158, 159
Thandal loans, 62
Tharakkar moneylenders, 58
Thirty-rupee gold piece, 4
Thomas, Dr. P. J., 154 n.
' Token ' currency, 4, 7, 8, 22
Townsend Committee, 77, 84
Trade statistics (1929-32), 49, 52

222 THE MONETARY PROBLEMS OF INDIA

Transfer of Property Act, 179
Travancore, 70, 101, 103, 157 w. :J
Treasury balances, 119
Treasury bills, 39, 40, 135-7
Treatise on Money (Keynes) 199 n.
Trip, Dr. L. J. A., 158 n.
Two-anna piece, 8 n.

Union Bank of India, 98

United Provinces, 57, 58, 61 n.-,
t>7, 7i, 72, 74. 77. 78 n., 81-3,
100-3, 118, 130 n., 157 w. 2 , 161,
163, 171 n., 199 w. 1

Universal notes, 6, 17

Upper India, Bank of, 90
Usurious Loans Act, 168

Vaishyas (bankers), 59
Vakil, C. N., 5 w. 2 , 6 w. 4

War of 1914-18, its effect on the

monetary situation, 10
Ways and Means Advances, 137
World Economic Conference, 190,

191, 201

Young, Hilton, Commission, 187,
196, 197

PRINTED IN GREAT BRITAIN BY
BILLING AND SONS LTD., CUILDFORD AND ESHER

SY THE SAME AUTHOR
15j. net.

Indigenous Banking in India

PROFESSOR J. M. KEYNES. " I have read it with much interest ;
it fills a distinct gap in monetary literature."

MR. M. M. S. GUBBAY (Ex-Controller of the Currency for India).
" It is a valuable addition to the literature on Banking in
India, and has a special significance in view of the Central
Banking System contemplated for India. It throws light on
the practical difficulties attendant on the question of bringing
the indigenous bankers within the sphere of influence of a
Central Bank."

The Scotsman. " Mr. Jain's volume contains a vast amount of
information regarding the history and development of banking
in India."

The Bankers' Magazine. " An excellent impression is given of
the functions of the indigenous banker, the part he plays in
the life of the country generally, his relation to the joint-stock
banks, and the faults of his methods and their economic
results."

The Economica. " Mr. Jain has succeeded in removing to a con-
siderable extent the veil that as he says has long obscured
the working of indigenous banking in India. . . . He has
not only utilised the available printed matter, but has
"collected fresh material by means of a questionnaire and
personal enquiries, and thus succeeded in making a very use-
ful contribution to the subject."

The Financial News. " Hitherto there has been no book in English
dealing with the ancient and widespread practices of native
banking in India, but this gap has now been filled . . .
associated by descent with the banking caste of the Jainas,
he (the author) writes from inside knowledge of his subject.
It adds to clearness as well as to interest that in illustrating
the intermediate position which Indian native banking holds
between casual money-lending on the one side, and ordinary
trading in merchandise on the other, and its links with both,
the author has adopted the historical method."

The Economist. " This book, which is the fruit of careful research,
fills a serious gap in the economic literature of India. 1 '

LONDON : MACMILLAN AND CO., LTD.